Borrowing through a SMSF

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Borrowing through a Self Managed Superannuation Fund

Changes to the superannuation laws in late 2007 have empowered Self-Managed Superannuation Funds (SMSFs) with the ability to borrow money for investment purposes.

Under the new legislation, SMSF’s can purchase property under an instalment arrangement in which the fund makes a partial payment on the property and borrows the remaining funds to pay the balance. The asset purchased can be residential, retail or light industrial property, or shares.

Whilst payments are being made, the legal title to the asset is held in a security trust on behalf of the fund. During this time however, the fund still enjoys a beneficial interest in the asset. The only recourse the lender has in the event of a default is that of the asset itself, with no right to the remaining assets of the fund.

Benefits of Leveraging

Invest directly in property or shares without having the full purchase amount in cash.

Enjoy the potential capital accumulation in the property.

Substantial tax concessions on any income earned from the property/shares and capital gains during both accumulation and pension phases.

All expenses on the asset are tax deductible

Despite the obvious advantages of borrowing within the superannuation environment, when considering borrowing for a purchase in a SMSF, it is important to note the following:

The trust deed of the SMSF must allow borrowing under an instalment arrangement.

Your proposed asset investment must be consistent with the investment strategy of the SMSF and the sole purpose test under the Superannuation Industry (Supervision) Act 1993.

The terms of the instalment agreement must be carefully drafted so as to ensure the SMSF remains compliant and maintains its tax reductions.

Even if parties to the borrowing transaction are members or related, all arrangements must be done at arm’s length and at market rates.

The SMSF must have sufficient cash flow to satisfy the loan repayments over the term of the loan. This cash flow may include income from the property, member contributions, and other investment earnings.

In contrast to ordinary loans, instalment arrangements typically require a deposit of around 30-40%.

Watch for lenders with multiple fee add-ons. These can include risk-fees, loan service fees, exit fees, title insurance fees, completion fees, right to repay fees along with a typical establishment fee.

It is crucial that before committing to a loan through an SMSF that professional advice is sought. In many circumstances, the risks and costs to a fund may outweigh the costs of setting up and maintaining an instalment arrangement.

Further to this, it is imperative that the arrangement is properly drafted and documented with express provisions on the operation of the non-recourse loan and instalment procedure. The SMSF division at Ferguson Cannon Lawyers are well-equipped to advise on the appropriateness of an instalment arrangement for your fund and can assist you with the following:

varying the funds trust deed to allow for borrowing under an instalment arrangement;
the preparation of the instalment contract ensuring compliance with applicable legislation;

Ferguson Cannon Lawyers are committed to providing an individualised service with the aim of achieving your personal wealth creation objectives and can prepare all documentation necessary to facilitate borrowing through your SMSF.

Please contact Byron Cannon or Sam Barber at Ferguson Cannon on (07) 5443 6600 or by email:

Byron Cannon: byron@fclawyers.com.au

Sam Barber: sam@fclawyers.com.au

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Category: Business & Corporate Services, Fact Finders, General, SMSF, superannuation

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