SMSFs, Property Investments and LRBAs

B2B Editor16 September 2016

SMSFs, Property Investments and LRBAs

As more people are taking control of their superannuation by establishing a self-managed superannuation fund (SMSF) it is becoming increasingly popular to buy property in an SMSF.

There are a number of important conditions when investing in property through an SMSF:

  • Residential property cannot be purchased from a member or related party;
  • Residential property cannot be used by a member or related party, even if they are paying market rent.
  • The property must be used solely for providing retirement benefits to members. The restriction on purchasing and leasing residential property does not extend to commercial property. A commercial property can be purchased from members, and can be leased to a member or related party on commercial terms.

Generally, SMSFs are prohibited from borrowing but there are limited exceptions. One such exception is borrowing through a Limited Recourse Borrowing Arrangement (LRBA) to invest in property. An LRBA means that the lender only has access to the property in the event the SMSF defaults on the loan – the other assets of the SMSF are protected. Using an LRBA to purchase property in an SMSF can allow you to accumulate wealth more quickly but borrowing to purchase any investment will increase the level of risk associated with that investment.

An LRBA must be properly structured and can be complex to set up – for example, your SMSF can use the funds from an LRBA to purchase and repair a property, but not to improve that property. In addition, and LRBA can be more expensive than other property loans. It will be necessary to maintain sufficient cash reserves in the SMSF to meet loan repayments. This may impact on other investments held by the SMSF, particularly if rental income from the property is not sufficient to cover loan repayments.

Ultimately, the decision to invest in property in an SMSF requires the same consideration that you would give any other investment – what is the level of risk, do the returns on the investment justify the risk and expense of borrowing, and how does this investment fit in the overall investment strategy of my SMSF? A properly structured property investment, with or without an LRBA, can be an effective investment for an SMSF.

See our video at www.gillespiegroup.com.au/client_tools/video_gallery for an animated explanation of LRBAs.

For advice on establishing an SMSF, setting up an LRBA, or finding the right investments for your SMSF contact the team at Gillespie Wealth Management on 6260 4994 or at [email protected]
John Gillespie is an Authorised Representative of Gillespie Finance Directions Pty Limited
AFSL 478547
Phone: 02 6260 4994
68-70 Dundas Court
Phillip ACT 2606

Gillespie Wealth Management