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I have owner occupied/investment property. I have $2M loan on my property, and $2M sitting on my offset account, therefore paying no interest.

  1. Can I use my cash in the offset to lend to my SMSF to buy a property?
  2. If so, can I deduct the interest paid by SMSF to me, and deduct under my name, as I would when I buy an investment property outside SMSF?
  • It would be great if you add a country code and definition of acronym SMSF. – JTP - Apologise to Monica Mar 15 '16 at 1:34
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    @JoeTaxpayer - SMSF stands for Self Managed Super Fund, an Australian retirement fund which is self managed. – Victor Mar 15 '16 at 1:43
  • Do you have one property or more than one property? Your main residence cannot also be an investment property, unless you are renting out one or some bedrooms in a shared accommodation arrangement. – Victor Mar 15 '16 at 1:47
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Yes you can lend part of this money to your SMSF so that the SMSF can buy an investment property or other investments such as shares. However, the loan to your SMSF must be at commercial rates, at arms length and be of limited recourse in nature.

As the loan to your SMSF would be of limited recourse nature it may require you to charge a premium above the full recourse rate that you are paying on your mortgage outside of the SMSF. It is best for you to look at similar prevailing interest rates charges by major banks to SMSFs and use these rates as a benchmark for what rate you charge your SMSF - this way you can show you are using commercial rates.

The limited recourse nature of the loan is unlikely to attract a lower rate than your home loan, so charging less than you are paying is unlikely to be acceptable to the ATO. The ATO may also be concerned that you are attempting to circumvent the contribution limits and are putting excess amounts into your super fund. If you set up these arrangements incorrectly there may be serious tax implications for both yourself and your SMSF.

In essence, your SMSF can claim a tax deduction against the interest it pays you for the loan and you would make a profit (gain) from the interest you collect from your SMSF minus the interest you pay your bank for your mortgage. So your SMSF would get a tax deduction at the tax rate of 15% but you would pay tax at your marginal tax rate (usually higher than 15% unless you earn very little income).

So for your Q2. If so, can I deduct the interest paid by SMSF to me, and deduct under my name, as I would when I buy an investment property outside SMSF? No your SMSF (being a separate entity) would deduct this interest paid by the SMSF not you, you would actually include it as income under your tax return.

  • Thank you Victor. Great answer. If I understood correctly, if I use the money in my offset account to lend to my Super, I have to charge higher rates/commercial rates to be considered arm's length, but cannot deduct the interest the SMSF is paying, which is actually considered income not deduction. That is different than if I use that money to buy an investment outside Super, which allows me to deduct the interest paid on the borrowings. On the LRBA, will my property outside Super be a guarantee as well, or it's the property I'm buying is Super which is the Guarantee. Where can I find a ruling – D.W. Mar 15 '16 at 6:04
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    @D.W. - as I mentioned the SMSF is a separate entity from yourself and any other members of the SMSF, thus if you lend money to it then the SMSF pays you interest, thus it is an expense for the SMSF and it is income for you. Imaging the SMSF is a person who has asked you for a loan, and in return for the loan it will pay you interest. This interest is an expense for this other person and income for you. If you look under the SMSF section of the ATO's website you will find all the details and rulings in regards to SMSFs. – Victor Mar 15 '16 at 8:47

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