Adding Value to your SMSF
Following a change in law, superannuation funds are now starting to borrow to fund certain investments. Whilst the change in the law has been with us for a number of years, it is only now that more people are taking up the opportunity to borrow to invest in their Self Managed Super Fund (SMSF).
Borrowing to invest means that a SMSF can essentially accumulate fund capital quicker than it could do by relying on contributions alone which is a great way to build for retirement.
As you may be aware, there are strict rules governing how a SMSF operates and what it can and cannot do. Under a borrowing arrangement, a SMSF can only borrow to acquire an “acquirable asset” and the borrowings need to be limited recourse (i.e. the ability to recover the debt is limited to the asset acquired).
Acquirable assets include a variety of assets but are commonly property both residential and commercial as well as listed shares.
The structure of a borrowing arrangement is fundamental to the acceptance by the regulatory authorities as a SMSF cannot directly borrow. Essentially, the asset is held by a bare trust which takes out the financing (rather than the SMSF itself) with the asset only being transferred into the SMSF when the borrowings are fully repaid.
The terms and conditions in the borrowing arrangement needs to be considered in detail to ensure it does not give rise to any unexpected issues such as contributions to the SMSF which could breach contribution thresholds.
There are a number of other considerations that need to be addressed when the trustee of an SMSF is considering borrowing to fund an investment including but not limited to:
whether the SMSF can borrow under the trust deed;
the investment strategy of the SMSF; and
ability of the SMSF to repay the borrowings without utilising additional contributions.
The source of the funding for SMSF borrowings does not have to be a third party bank. A related party (e.g. a member of the SMSF) can lend to the SMSF. In such circumstances there are additional checks and balances required to be satisfied, however, if these are satisfied you may be able to grow the capital in your SMSF at a faster rate than if the SMSF borrowed from a financial institution as well as optimizing your overall tax position.
Lending to a SMSF is subject to strict regulation, however, it presents a good opportunity to plan for the future of you and your family. As always, whether this is appropriate for you depends on your personal circumstances.
Should you wish to discuss establishing a borrowing arrangement or a SMSF generally please contact your relevant ESV Engagement Partner on 9283 1666.
Article by David Prichard