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Can SMSF Borrow Money?

Are you considering borrowing with your SMSF?  Wondering if borrowing is permitted in a SMSF account?  Yes, SMSFs can borrow.
SMSF borrowing
 
In 2007 the Superannuation Industry (Supervision) Act 1993 (SISA) was amended to permit borrowing to obtain assets that normally follow under the guidelines of SMSF. As a result super and self-managed super have become a structure that offers numerous advantages.
Borrowing and buying property through your superannuation fund
That is another opportunity and why you should now consider an SMSF rather than a public offered fund even when your balance is not just $500,000 or above. Over that amount is when SMSF offers more advantages due to cost scale.
 
 
After a review by the government it was determined that SMSFs can be used for installment warrants. This change came about due to the regulator’s feeling that installment warrants are not in line with the law.
 
Now according to section 67 (4A) SMSF can borrow to fund purchase of assets under certain situations:
  • the lender can only seek repayment of the amount borrowed against the SMSF
  • borrowing can only take place when an asset could otherwise being acquired legally in the even there were funds
  • the SMSF holds the asset on trust
  • the SMSF obtains a favorable interest in the asset from the beginning
  • the SMSF has the legal right to obtain the title as a result of making payments
Benefit of gearing
The new SMSF rules allow you to create wealth due to the following:
  • larger sum allowing diversification within SMSF if desired
  • compounding return on SMSF assets
  • the benefits of leverage
  • tax advantages of super funds
  • estate planning advantages of SMSF
  • the effects of negative gearing
Much of the new structure around SMSF borrowing that went into effect in September of 2007 is similar to a pre-1999 geared unit trust other than the loan lacks recourse and is obtained through the SMSF rather than the trust.
Things you need to take into account about borrowing in SMSF
1. Loans
Important considerations when choosing a gearing product:
  • compliance and structure;
  • fees; and
  • choice/flexibility.

2. Choice

  • Are the borrowed money and the assets tied together?
  • Do you have a choice over the property
  • Are you about to select the trustee?
  • Do you have a choice is selecting the tenant?
3. Cost and transparency
  • You need to take into consideration the cost of the loan which include:
  • Are fees based on the current value of the real estate?
  • Who charges what and why? Can you change them if you desire to?
  • Can you auditor deal with it in a routine manner? Does he have experience with this structure?
  • Are any costs associated with early payout?
 
4. Personal guarantees
Are trustees required to make guarantees? If so how would they be viewed by the Australian Taxation Office (ATO)? Would they be subject to highes tax rate?
You may choose to use the DIY route but you must consider whether you are lending at the required arms length rate in regards to the security and backing of the loan?
 
5. Paying off the loan — retirement phase
  • Do you intend to pay off the loan?
  • You also need to consider what happens when the loan is paid out.
  • Will you be accountable for any capital gains tax? 
  • Are the proceeds of the sale tax free?
  • Will you receive an exemption 20 years down the road? 
  • Is the asset a business real property?
Under a traditional warrant the warrant trustee is required to transfer the assets to the super fund upon the loan being paid out. There are costs involved in regards to stamp duty if the transfer does not meet certain guidelines.
 
Due to the nature of the transfer a long time down the road, no one can be sure that the exemptions of today will still exist down the road.
 
 

 

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