Your Self Managed Super Fund can now borrow to invest

As Self Managed Superannuation Funds (SMSF) become more popular, the demand for more investment opportunities within this structure increases. Changes now mean that as long as strict conditions continue to be met, your SMSF can now borrow to invest, thus further bolstering retirement savings.

How does it work?

Borrowing for investment within superannuation depends on what type of asset is being purchased; however, the basic principles of an instalment arrangement, whereby the fund pays a percentage upfront and the remainder in instalments over a period of time, remains the same.

Investment property

All investment property will be owned by a separate entity, known as a Security Trust, with the SMSF having a beneficial entitlement to the Trust. The Trust can lease the property on commercial terms, with the income used to pay any expenses associated with the property. The net income is then paid to the SMSF. It is this income, along with any other fund income or member contributions, that provides the income source for the loan repayments.

Under a limited resource loan, the property is security for the loan, which in the event of a default provides the lender with recourse to the property and assets owned by the guarantors, but not over any other assets held by the SMSF. After the loan is repaid, the SMSF has the right, not the obligation, to acquire the property.

What are the benefits?

There are many benefits associated with borrowing through a SMSF. Some of these include:

• an increased exposure to capital gains
• reduced rates of capital gains tax
• access to tax deductions within the SMSF.

Things to consider

Before borrowing through an SMSF, the following factors should be considered by potential borrowers:

• The SMSF trust deed must allow for borrowing
  under an instalment arrangement.
• Investment in certain asset classes must be
  consistent with the SMSF’s investment strategy.
• The instalment arrangement must meet certain
  requirements to ensure that the SMSF remains compliant.
• The SMSF requires sufficient cashflow to service
  the loan over the term of the loan. Cashflow must be sourced from the net
  income of the asset, other investment earnings, or member contributions.
• Arrangements must be at arm’s length and transacted
  at market rates.
• The benefits of the strategy must be weighed
  against the cost of setting up and maintaining the arrangement.
• Professional investment, taxation and legal
  advice should be sought before entering into an arrangement.

This is a very complicated area and the penalties for non-compliance are severe. Before you do anything, consult a SMSF specialist/financial planner and then call us to assist with the finance.

KK’s gut instinct

This is blindingly obvious, the latest interest rate rises have tempered the residential property market and the forecast of another increase will dampen spirits even more. I have attended numerous auctions of late for property ranging $400K to $550K, sales are down, bidders are at times non-existent and pressure is now on sellers to negotiate below reserves. I anticipate good buying over the coming months. Call me with your thoughts on this or post a comment below!

Sporting tip of the month

With the Spring Carnival now over, the focus turns to tennis, car racing and footy. Gosh we do live in an amazing city for sport and entertainment. Long range forecasting this month: Federer wins the Australian Open, Sebastian Vettel the Melbourne F1 Grand Prix and Collingwood vs Carlton in the 2011 AFL Grand Final…easy pickin’s!”

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