Home About Our Expertise Our Team Careers Fact Finders Contact

• Superannuation & SMSF
• Setting up a SMSF
• Borrowing Through A SMSF
• Trustees Obligations
• Legal Action & SMSF
• Superannuation Guarantees

• Protecting your Superannuation upon Death

Borrowing Through A SMSF

Changes to the superannuation laws in late 2007 have empowered Self-Managed Superannuation Funds (SMSF’s) 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, 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.

Advantages to SMSF Borrowing

Despite the obvious advantages of borrowing within the superannuation environment, it is important to note the following before doing so:

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

Important Considerations before Borrowing

• Even if parties to the borrowing transaction are members or related, all arrangements must be done at arm’s length and at market rates. There are a number of regulations and prohibitions under the SIS Act that must be complied with when dealing with related parties.
• 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 certain 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.

SMSF – Borrowing to purchase your business premises

• The Superannuation Industry (Supervision) Act 1993 allows a number of investment concessions enabling SMSF’s to enter into transactions with related parties of the fund (members, relatives etc.), where those transactions involve ‘business real property’.
• This exception to the rule that trustees are prohibited from acquiring assets from related parties enables business owners to purchase their own business premises and pay rent to themselves (their SMSF).
• Business Real Property has recently been defined in a draft ruling by the commissioner of taxation. An asset is considered a ‘business real property’ if the following three requirements are satisfied:
• The property is considered ‘real property’, defined as land and any other attached buildings or fixtures. 
• The relevant entity has an eligible interest in the property such as a freehold or leasehold.
• The real property is used wholly and exclusively in one or more businesses.
• This concession essentially allows an SMSF member to own their business premises and pay rent to themselves. The transactions between the SMSF and the business must be at arm’s length and on commercial terms. The following diagram demonstrates the transactions involved:

 

Ferguson Cannon Lawyers have an experienced team of lawyers that will be able to assist you with all of your requirements relating to SMSFs. For any further queries please do not hesitate to contact Byron Cannon, Director, or Samuel Barber, Lawyer on 07 5443 6600, or email byron@fclawyers.com.au or sam@fclawyers.com.au.