SMSF Borrowings

The general rule is that self-managed super funds can borrow money only in very limited circumstances.

These circumstances include:

  • borrowing money for a maximum of 90 days to meet benefit payments due to members or to meet an outstanding surcharge liability (the borrowings can’t exceed 10% of your fund’s total assets)
  • borrowing money for a maximum of seven days to cover the settlement of security transactions if the borrowing does not exceed 10% of your fund’s total assets (you can only borrow to settle security transactions if, at the time the transaction was entered into, it was likely that the borrowing would not be needed)
  • borrowing using instalment warrants or limited recourse borrowing arrangements that meet certain conditions.

A trustee can use a limited recourse borrowing arrangement to fund the purchase of a single asset (or collection of identical assets that have the same market value) to be held in a separate trust.

Any investment returns earned from the asset go to the SMSF trustee. If the loan defaults, the lender’s rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF.

Limited Recourse Borrowing Arrangements

Since 2007 super funds can finance investments with limited recourse borrowing arrangements if they comply with section 67A of the SISA.

Limited recourse borrowing arrangements must comply with the following:

  • The borrowing is only permitted over a single asset or a collection of identical assets that have the same market value, e.g. one property or one parcel of BHP shares.
  • The recourse of the lender against the super fund on default is limited to the single asset that was financed under the limited recourse loan. This means that all the super fund’s other assets are protected.
  • The super fund cannot borrow to improve an asset (for example real property).

Tax Tip:

The ultimate aim with self-managed super funds is to build a portfolio of investment earning assets (a mix of term deposits, shares and property), so that on retirement when the fund is put into the pension phase, 100% of the fund earnings will be tax free.

 

Fortiz Accountants is one of the few accounting firms which is licensed to provide advice on superannuation and SMSF (AFSL No. 483940). Contact us today for assistance with your SMSF tax returns and tax advice. We can also provide referrals to mortgage brokers who can assist with SMSF loans.

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