You can't put other assets at risk when borrowing inside your self-managed fund, writes Sam Henderson, who answers your questions on superannuation.
Q: We are 43 and 45 and have a commercial property in our superannuation fund valued at 1.3 million. We owe $700,000 on this, which was lent to the fund by its members (my wife and I). We get about $125,000 rent plus the $45,000 my wife and I contribute each year to our self-managed super fund (SMSF). We have had the property for two and a half years and have paid $200,000 of the loan. We want to buy another commercial property for 1.7 million that could give us rent of about $156,000 a year. Can we use the equity in the first property to purchase the new property? Or can I loan the fund $400,000 and borrow the rest from the bank? Or must I have a minimum of 20 per cent in cash in the SMSF to borrow the rest from a lender? Adam
A: Adam, unfortunately you cannot cross-collateralise properties for which you want to borrow money inside an SMSF. The very name of the borrowing deal will give you the clues – limited recourse borrowing arrangement (LRBA).
You cannot put other assets at risk when borrowing money inside an SMSF. This works to your advantage if something goes horribly wrong, as the bank has recourse only against the asset to which the borrowing relates unless you sign a personal guarantee (which is not recommended).
As you may have already discovered, the banks are being quite risk-averse on SMSF loans at the moment and the interest rates are around 1 per cent higher on an SMSF loan versus an owner-occupier loan. They will also require a steep deposit on a commercial property, usually about 35 per cent plus costs.
The banks will also likely require adequate liquidity to the tune of up to 10 per cent of the gross value of the property. I suggest you do your homework thoroughly, get your finance approved before exchanging contracts and make sure all your paperwork is appropriately constructed. In other words, approach with extreme caution and seek expert advice throughout the process.
Q: Can my SMSF buy a parcel of land? Kelvin
A: Kelvin, it certainly can. There's no problem in purchasing a block of land in a self-managed super fund, and you can even build a house or a block of units on it, and rent them out. Of course, you'll need to reflect your intentions and objectives in the fund's written investment strategy (including insurances, risks, liquidity, diversification etc).
The issue arises if you want to borrow money on the land and then desire to use borrowings to build on the land too. You certainly wouldn't be able to subdivide until the land is paid off as you can only buy a "single acquirable asset". This may include a contract for a "house and land package" which is fine. As you can see, the laws around this can be complex. Some advice from an expert to clarify your needs, goals and objectives is highly recommended before you risk the penalties of fines, jail or losing half your assets in penalties.
Q: Hi Sam, I am retired, 62 and have an SMSF with a balance of $1.6 million in pension phase. I have made a non-concessional (after-tax) contribution of $100,000 for the 2017-2018 year. Can I also make a concessional (pre-tax) contribution of $25,000 this financial year and claim a tax deduction? Brian
A: Brian, you can't make a non-concessional contribution if your account balance exceeded $1.6 million on July 1, 2017 so you'll need to withdraw your contribution. You can make a concessional contribution (15 per cent tax paid or 30 per cent contributions tax if you earn more than $250,000).
If you're retired and your taxable income is less than $18,200, then this would be futile because you're triggering an unnecessary tax. If, however, you're working or you have investment income, then the concessional contribution is a worthwhile strategy to reduce your tax.
This would also be the case if you have a partner who has less than $1.6 million. It would be worth entertaining the idea of making a non-concessional contribution in their name to get the money into superannuation.
Everyone has a superannuation balance cap of $1.6 million as at July 1, 2017 and non-concessional contributions cannot be accepted if you exceed this figure. I suggest you talk to your administrator or accountant about sorting out the issue before the end of the financial year.
By Sam Henderson
29 November 2017