A record number of self managed super funds (SMSF) are being set up to purchase working properties as more Aussies move out of cities into outlying, coastal and regional areas.
We are being inundated with people wanting to borrow money through their SMSFs to purchase farms and other types of properties with land that include commercial ventures so they can live on the properties and work the businesses. There are strict rules around what you can purchase with your SMSF, but there is more flexibility when it comes to farms.
In order to enjoy the tax benefits of growing wealth and managing your funds through a SMSF, you are required to maintain an arms-length distance from certain purchases. This requirement is designed to stop people from abusing the tax benefits of self-managed super.
So if you purchase a residential property through your SMSF, you are not allowed to live in the property. People connected with the SMSF and their direct family are required to keep an arms length distance from the property and if they don’t they risk losing the tax benefits.
What are the most commonly asked questions?
When it comes to a property with land such as acreage that has a business on the land, i.e, a farm, this is one of the exceptions. You can live on the property as long as you are running the business. These are the most common questions about SMSFs and working properties.
What type of common farm business can SMSFs buy?
We are receiving many applications for loans from SMSFs for the purchase of properties with land that involve your typical run-of-the-mill farming businesses. These include operations that involve growing produce, engaging in dairy farming and raising cattle.
Are there other types of farming businesses SMSFs can buy?
We are receiving applications for loans to purchase properties with land that include unusual businesses such as leech farming, woodturning, cheese making, and permaculture gardening.
We are also seeing a lot of farm stay businesses and cooking businesses that involve using produce grown on the property. It seems a lot of people are finding interesting and diverse ways to turn properties into high successful working farms of some description.
What type of interest rate can SMSFs get?
Over the last couple of years, interest rates for SMSFs have reduced. New competitors have moved into the sector bringing with them a more diverse range of loan products for SMSFs.
Loan interest rates vary depending on the property type, location and loan to value ratio. Loans for residential property range from 3.39% p.a. Loans for commercial property range from 4.19% per annum and loans for rural and farm properties range from 5.29% p.a.
How much can SMSFs borrow?
When it comes to SMSFs borrowing money, the maximum percentage of the loan will depend on the postcode and property type, as well as the SMSF’s ability to service the loan. Loans for residential and commercial property can achieve up to an 80% loan to value ratio.
This means the SMSF would only need to fund 20% plus costs such as stamp duty and lender’s fees. Generally, SMSFs need to stump up a bit more money for rural and farm properties as lenders like to achieve a loan value ratio of 50 to 65%.
The other vital issue is that lenders do not take into account other assets like water licences and other farm assets. These are usually deducted from the valuation which can lower loan size requiring the SMSF to have an extra buffer of funds to ensure the purchase is possible.
Can I lend money to my SMSF?
Can I lend money to my SMSF is a question I get a lot from clients. The answer is yes.
Lending for large acreages and farms can be challenging. When it is not possible to secure a loan from a traditional lender to complete a transaction, we can look at a number of private lenders we work with or the option of organising a related party loan (i.e. client lends money to their SMSF) – money which is often raised against their equity in their personal capacity.
Is it a good time to review my SMSF interest rate?
If you have already purchased a property with land and a going concern, it is a good time to review your loan. With the arrival of new finance providers in the market, it could be a good time to review your interest rate and terms and see whether you can actually save yourself some money and in turn grow your superannuation investment faster.
Yannick Ieko is the founder and managing director of NDIS Loan Experts and SMSF Loan Experts, highly respected brands that have been diligently providing the market with loans and guidance for lending for over 12 years.