SMSFs or self-managed super funds can be used for purchasing assets including property or shares by utilising money from the fund and borrowing the remainder. This will allow the SMSF to obtain assets that it can’t currently buy outright due to lack of funds. Considering the rules, self-managed super funds may borrow for investing by utilising a ‘Limited Recourse Borrowing Agreement’ or LRBA.
The following are the benefits of borrowing from your self-managed super funds.
Increased Chance for High Returns
Superannuation ultimately exists to provide members with income during retirement. Gearing, or borrowing from self-managed super funds property investment, may enable your SMSF to obtain assets that it can’t possibly purchase on its own, which can consequently improve the returns of your SMSF in time.
Second, borrowing from your SMSF to invest may help to diversify your SMSF portfolio. A diverse SMSF portfolio may lower the risk and increase your returns over time. It can likewise make your super’s portfolio more liquid, such that a broader range of investments means that it may be easier for you to liquidate some of them if you need quick cash.
Lastly, the interest and other expenses related to the loan are tax deductible, meaning that any tax that needs to be paid within your self-managed super funds property investment will be reduced, says sentinelpg.com.au.
Likewise, if your loan is positively geared, where the rental income is higher than the interest and the related expenses, there is a tax cap of 15%, which is considerably lower than your personal taxes. Once the investment you borrowed with your super is sold, the capital tax gains will be capped at 10% or zero when you’re in the pension phase. This basically makes borrowing for investing within your super extremely tax-effective.
Because there may also be risks involved when investing with your SMSF, know that only those with an Australian Financial Services Licence are capable of advising you on SMSF investment options. Additionally, it is strongly advised that you get your own tax, legal, and financial advice from licenced advisers prior to entering an LRBA through your super.