Self Managed Superannuation Fund Borrowing - lock in the benefits now
The Government’s Cooper review is currently assessing Australia’s superannuation system, including the suitability of borrowing in Self Managed Superannuation Funds (SMSF). If you are thinking about undertaking a borrowing arrangement in your SMSF, now may be the time to implement it.
How it works
In September 2007, the Superannuation Industry (Supervision) Act 1993 was amended to permit the use of borrowing in an instalment warrant arrangement. These new powers are embodied in section 67(4A), which enables an SMSF to borrow to fund the acquisition of an asset on the following conditions:
> Recourse of the lender against the SMSF is limited to the asset itself;
> The asset is an asset the SMSF could otherwise legally acquire (if it had the funds);
> The asset is held on trust for the SMSF;
> The SMSF acquires a beneficial interest in the asset from the outset; and
> The SMSF has the right to acquire legal title on making one or more payments.
To achieve this, the SMSF Trustee borrows money under a limited recourse loan and uses this money to invest in a special purpose trust (otherwise known as a ‘bare trust’). This bare trust is used solely for the purpose of holding the asset subject to the borrowing. The SMSF trustee is then obliged to make payments for the asset under an instalment arrangement. Once the SMSF has paid all the instalments, title of the asset is transferred to the SMSF.
The benefits
The benefits of borrowing are wide ranging depending on your circumstances but include the following:
- It allows the Trustee of the SMSF to obtain leverage to acquire those assets that normally would be out of reach;
- It maximises the wealth effect in the SMSF in times when assets of the fund are rising;
- The period of the borrowing can be short or long, allowing it to be structured to the underlying circumstances of the fund members;
- It allows more assets to be contributed to the fund without breaching the contributions limits, thus avoiding excess contributions tax;
- The tax benefits that arise from negative gearing; and
- Property transferred into the fund could potentially be sold tax free to a third party in future, if the member is of pension age.
If you wish to explore your options with SMSF borrowing, please do not hesitate to contact our office. As with all SMSF matters, great care must be taken to ensure that the borrowing strategy is compliant with superannuation laws. The specialised team at MTA Optima can advise you on the most tax efficient strategy to get the best return out of your SMSF.
Preliminary recommendations from the Cooper review will be released April – May 2010.