Borrowing Within SMSF: Is It Worthwhile?

Have you ever considered using your superannuation to purchase property? Since borrowing within Self-Managed Superannuation Funds (SMSFs) was permitted in 2007, many Australians have used this strategy to accelerate asset growth. But with recent changes in the SMSF lending market, you may wonder: Is this strategy still right for me?

What is SMSF Lending?

SMSF lending allows your super fund to borrow money to invest in property or other assets. The loan is secured against the asset being purchased, and the SMSF is responsible for repaying it with interest. Unlike traditional home loans, SMSF loans must comply with Australian Taxation Office (ATO) regulations for self-managed super funds. These loans can be used to invest in residential or commercial properties, aligning with your long-term retirement strategy.

Is SMSF Borrowing Right for You?

Consider your personal financial goals when evaluating SMSF borrowing. For instance, some business owners find that purchasing their commercial property within their SMSF can help them separate property ownership from their operating business activities. This approach can potentially deliver long-term financial benefits, including rental income and capital growth within a tax-effective structure.

However, it’s crucial to carefully weigh the costs and risks involved before making any decisions. Let’s explore some key questions to help determine whether SMSF borrowing is an appropriate and viable option for you:

• What is your purpose? Are you looking to diversify your retirement assets, or do you have a specific property in mind? A clear investment strategy should drive your decision—not just potential tax benefits.

• Do you understand the costs? Borrowing within your SMSF can be more expensive than traditional lending. Setup fees usually range from $1,500 to $2,000, and you might face an interest rate premium of 1.00-1.50% compared to borrowing outside of super. For example, on a $1 million loan over a 30-year term, this could result in significantly higher interest costs, so you’ll need to ensure the tax benefits and other advantages offset these costs.
• Do you understand the rules? Before borrowing in an SMSF, it’s vital to understand the rules, particularly for Limited Recourse Borrowing Arrangements (LRBAs). These allow borrowing to buy a single asset, held in a separate trust. Non-compliance can result in penalties and tax issues, so professional advice is crucial.
• Are you prepared for change? SMSF borrowing is sensitive to changes in laws and lending products. The right strategy today may not be as effective in the future, so flexibility and adaptability are essential.

The Importance of Expert Guidance

While SMSF lending can be an effective tool for building wealth, it’s not a decision to make lightly. The complexities of SMSF borrowing require careful consideration of your long-term financial goals, potential costs, and legal requirements. That’s where we come in.

How we can help

If you are considering ways to maximise your retirement nest egg and would like to understand more about SMSF, please reach out to your Morrows advisor. We can introduce you to our financial and lending advisors, who can assess your circumstances and provide tailored advice.

Let us guide you in making the best decisions for your retirement strategy. Contact your Morrows advisor today.