SMSF Case Study

John and Jane Smith have an SMSF with $200,000 in cash and $50,000 in other assets. They would like to buy an...

John and Jane Smith have an SMSF with $200,000 in cash and $50,000 in other assets. They would like to buy an investment property within their SMSF. The property, however, is worth $400,000 which means the SMSF doesn’t have enough money to cover the full cost of the purchase. In this instance, the SMSF Trustees can apply for an SMSF Property Loan.

How does it work

The Smiths’ seek independent financial and legal advice to ensure it is appropriate for their SMSF to borrow money and purchase an investment property.

Once they have received this advice they begin establishing the trust structures required for the loan, ensuring they comply with the relevant Superannuation laws. The loan would then need to be taken out by the SMSF Trustee.

The Smiths’ will also need to set up a separate holding trust called a Bare Trust, which will be the legal owner of the property.

To purchase the property, the SMSF can use the $200,000 it has available in cash and borrow the remaining funds plus other associated costs, using the investment property as security for the loan.

The Bare Trust becomes the legal owner of the property, while the SMSF is the beneficial owner and receives the rental income. The rent (and/or other income from the SMSF such as investment income and super contributions) can be used by the SMSF Trustee to make the loan repayments.

It’s important to note that the loan is a limited recourse loan. In the event of a default, the Lender has recourse to the property security and any additional security provided by the Guarantors. The Lender will not have recourse to any other assets held in the Smiths’ SMSF.

Once the loan is repaid the legal ownership of the property is transferred to the Smiths’ SMSF via the SMSF Trustee.

This case study provided including all names and details is a fictitious example only and is provided for illustrative purposes to demonstrate the basic outline of how a SMSF Property Loan can be structured; it should not be relied upon for any reason and provides no determination of the potential tax implications of a SMSF Property Loan. We recommend your clients obtain independent financial, legal and taxation advice before making any financial investment decision. For more information, please refer to one of our Credit Advisers.

Important: SMSF Trustees considering a SMSF Property Loan must seek independent financial and legal advice.