Creating and protecting your wealth
  
  12.07.2020
SMSF Loans
  
Case Study 2
  

Bill understands that there have been changes to superannuation law that allow SMSFs to borrow to assist with the purchase of allowable assets and thinks that this may be the way to diversify his funds investment portfolio by purchasing a $500,000 residential investment property in a popular rental area.

Bill has spoken to his financial advisor and is advised that such a strategy fits within the investment strategy of the fund and that a loan of $300,000 would represent a prudent borrowing.  Bill intends that the SMSF sell $100,000 of the listed share portfolio and use $100,000 from the cash deposit to provide the balance of the funds to purchase the property. Bill is informed by his financial adviser that the property must be leased on a commercial basis. 


Summary
  • The fund has $520,000 in net assets ($300,000 in cash and $220,000 in listed shares) before the purchase of the investment property returning 6% per annum on average
  • The fund receives a minimum of $30,000 concessional contributions per annum 
  • The purchase of a $500,000 investment property is proposed 
  • The fund intends to borrow $300,000 at 7.6% variable interest rate P&I loan over 20 years to purchase the investment property

    The result of the proposed transaction is;
  • Bill's SMSF has $820,000 in assets ($200,000 in cash, $120,000 in listed shares and $500,000 investment property) post the property purchase.  The cash and listed share portfolio continue to return 6% per annum on average
  • The fund continues to receive member contributions of a minimum of $30,000 per annum 
  • The residential investment property is funded by a $300,000 loan and returns a 4% net lease income per annum, on average 
  • Asset diversification is achieved with property being introduced into the fund 
  • The proposed purchase is in line with fund's investment strategy 
  • The proposed purchase meets the fund's investment guideline limiting any borrowing to a maximum LVR of 60% 
  • The purchase meets SIS 'arms length' and 'sole purpose' tests 
  • The asset being acquired is an asset that the SMSF is not otherwise prohibited from acquiring

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