Restrictions

There are some legal restrictions when it comes to using Self-managed Superannuation Funds (SMSFs) to borrow money. There are certain rules a trust must abide by to be able to take out loans. Below you will find a basic, but not exhausted, guide to these rules:

• The asset to be purchased is one that the SMSF could legally buy if it had the money to do so;
• A 'security trust', also known as a 'custodian' or 'bare trustee', must hold the asset on trust for the SMSF;
• From the very beginning, the SMSF obtains a beneficial stake in the property;
• The SMSF is legally entitled to secure the legal title from the Security Custodian once the loan is paid off in full;
• The lender is restricted to a single asset in terms of the action or 'recourse' it can take against the borrower if the latter is no longer able to make payments. In other words, the bank cannot lay claim to any other asset that belongs to the SMSF if your SMSF defaults on the loan;
• Each loan can only be made out for one asset at a time, which means that separate loan arrangements need to be made in the case of strata titles or subdivisions since each title is viewed as a separate property.

There are some restrictions when it comes to any property bought by an SMSF when using a LRBA, namely that you can't construct a new home*, nor can you live in the home at any stage.

Note that if the purchase is for your business you may utilize the building for business purposes as long as rent is on commercial terms. While you can't sell a residential property to your SMSF if you or someone close to you owns it, you can do it with a commercial property.

• A ‘house and land’ package may be available.

You are not allowed to re-draw against the equity of an existing asset as this would breach the superannuation rules. For example you cannot use a property in your super fund as security to borrow further funds to acquire another property. The SMSF needs to have a separate deposit such as cash to secure another asset.

You can apply borrowed money towards expenses incurred in connection with the borrowing. However you cannot borrow money to construct a building on vacant land or use it to make improvements such as renovations (this would create a new asset).

Renovations and repairs are also a complex area in regards to SMSF properties:

• You can renovate and repair your property, although this comes with conditions regarding how you finance these activities.
• Regular maintenance on a property such as fixing leaking taps and other general running costs come with no legal problems.
• Carrying out significant improvements on your property are usually not able to be financed with a SMSF loan, as it must be used for the initial investment it was intended for and not to purchase new investments such as a home extension.
• Using funds from your own pocket rather than your SMSF to finance a renovation is another tricky area. Funding renovations with money from outside your SMSF could result in you personally owning some of the property while the SMSF owns another portion.
• Alternatively, contributing more money into your fund to finance the renovations could also bring with it challenges as there are strict limits on how much you can contribute to your super each year. We would be happy to connect you with an SMSF Specialist that can discuss the options available to you.
• You can seek a private ruling from the ATO to decide whether the work you're carrying out will be considered a significant improvement or part of normal maintenance. This gives you the backing necessary to help you follow the correct process. * A specialist SMSF advisor can help with these matters.

There are a number of guidelines on the ATO website that discuss what a renovation is versus maintenance or repairs.