SMSFs Can Now Borrow!

As if the Simpler Super laws did not bring in enough exciting changes, the Government recently enacted laws allowing a SMSF Trustee to borrow where it wants to acquire an asset. Importantly, the borrowing possibilities are wide, the rules broad and with a good asset base in a SMSF the opportunities for leverage are significant.

There are a number of benefits for a SMSF using leverage in the fund. Of course, great care must be had to what happens in the event of a loss in value of any asset acquired under a borrowing arrangement. As we are talking about a SMSF it is absolutely crucial to get the paperwork documentation right the first time. If a mistake is made it can result in serious financial penalties for the Trustee of the fund and potential financial consequences for fund members.

New Borrowing Rules

The Superannuation Laws have now been amended to allow the Trustee of a SMSF to borrow in the following circumstances: 

1. The borrowing is in the name of the SMSF Trustee
2. The borrowing is to acquire an asset that the SMSF Trustee is allowed to acquire. For example a SMSF cannot acquire residential property from a member or an associate but their business premises would be suitable as would residential property from a non-related party.
3. The asset must be held by a separate trustee (The “Security Trustee”) under an arrangement where the trustee of the SMSF makes an instalment payment into the trust to obtain beneficial ownership with further payment required to obtain full legal ownership. Any income, such as , dividends, rent or interest accrues for the benefit of the SMSF Trustee.
4. The borrowing is non-recourse and at the end of the loan period, providing all payments have been made to the lender, the security trustee will transfer full legal ownership of the asset to the trustee of the SMSF.

The Benefits of SMSF Borrowing

There are a number of important advantages to a SMSF putting in place the above structure: 

1. It maximises the wealth effect in the SMSF in times when assets of the fund are rising.
2. The borrowing can be for a short period or for a period of up to 10+ years allowing it to be structured to the underlying circumstances of the fund members.
3. Members and related businesses can act as lenders provided that all lending is at arms length.
4. It increases the flow of non-contributions funds into the SMSF thereby circumventing the excess contributions tax rules.

Some quick SMSF borrowing strategies 

Here are some quick ideas and strategies that you may want to consider: 

1. Member financing – the member may wish to transfer a business property that they own into the fund by way of the borrowing rules. The member may act as the trustee of the borrowing trust as well as the lender. Over time the SMSF can make repayments which can then be contributed back into the fund by the member subject to the contribution rules.
2. Buying a big asset – borrowing lets the trustee of a SMSF obtain leverage to acquire those assets that normally would be out of its reach. This may include farms, non-member owned residential property, business real property and property development.
3. Contributing more assets into a SMSF – the contributions rules limit the $ amount of contributions that mat be contributed to a fund. However, as an investment in the SMSF borrowing arrangement is generally accounted for as net of liabilities, where the member has shares, business real property, managed funds or any other asset they are legally allowed to contribute to the fund – more can be achieved with SMSF borrowing.

Warning – get advice first.

As with all SMSF matters, great care must be taken to ensure that the borrowing strategy employed is legal, compliant with the superannuation laws and does what everyone expects. In addition, a review of what may happen in the event of death or incapacity of the member – particularly where member financing is employed – must be undertaken.


For more information contact Superannuation Principal, Mark Geldens, via email or (02) 8346 6000: Email Mark