What to Borrow through your Self-Managed Super Fund? – what you need to know

In September 2007, trustees of Self-Managed Superannuation Funds (SMSFs) were given the green light to borrow for investment in certain assets. But interpreting the borrowing laws has always been open to conjecture. At Mornington Financial Services we have been navigating the nuances of Self-Managed Superannuation Funds with our clients, it’s an extremely complex area. Used correctly there are substantial benefits that can be gained.

 

What to borrow in your Self Managed Super Fund

Tips on Borrowing in your SMSF

 

In a recent SMSF draft ruling, the Australian Taxation Office (ATO) explained its interpretation of SMSF borrowing in relation to how it intends to regulate it.

 

One of the main points of clarification is exactly what assets SMSF trustees can purchase by borrowing.

 

For example, if the trustees borrowed to buy an apartment with its own carpark on a separate title, providing state law determined that the two could not be sold separately, the ATO would view this as a single asset.

 

Conversely, if the trustees wished to buy two neighbouring blocks of land held on separate titles but the vendor would only sell them together, the ATO would view them as two assets requiring two individual borrowing arrangements.

 

Sounds crazy, although they can be a fantastic investment structure, a great deal of care needs to be taken when structuring investments, this is where as financial planners we can not only add a huge amount of value but security. We don’t need to discuss the serious consequences of a non-complying fund.

 

When borrowing through an SMSF, it pays to seek the professional guidance of your Futuro adviser because there are a number of traps that trustees can fall into. These are just a few points to consider:

 

Selecting the right asset – Whether you are buying property or other asset types, it’s important to be sure of your purchase. Your Futuro Adviser can help you to understand what type of investment will suit your SMSF’s objectives in terms of risk, return, future saleability and so on.

 

Appropriate lenders for an SMSF– SMSF trustees may borrow from related or unrelated parties, providing that the loan complies with the Superannuation Industry Supervision (SIS) Act, 1993.

 

Limited recourse – It’s important that the finance is a limited recourse loan, meaning the lender cannot claim against the SMSF’s other assets should there be a hiccup when servicing the mortgage.

 

Tax – Particularly when property is concerned, don’t take the vendor’s word that everything’s fine. Gearing in superannuation has its tax advantages, but there are a number of pitfalls too. Again, seek professional advice and have the maths done.

 

Gearing within an SMSF can be a rewarding investment approach, but careful consideration is required.

 

If it sounds like a strategy for your SMSF, talk it over with a financial advisor at Mornington Financial Services, and make all your decisions informed ones.

 Brought to you by Andy Fenton http://morningtonfs.com.au Financial Planners

Sources: A) http://www.businessinsider.com/Tips for borrowing through your DIY super for property investment 2011

http://www.supermatters.com.au SMSF borrowing Hot Topics – 2009

B) For publication