Tips and traps of borrowing in Self Managed Super Funds
The top 10 tips and traps for borrowing in Self Managed Super Funds are:
- It maximises the ability to grow your wealth in the SMSF during periods where assets of the fund are rising, although care should be taken in falling markets.
- The borrowing can be for a short period or up to 20 or more years for related-party financed loans, so can be structured to suit the underlying circumstances of the fund members.
- Members of the fund and related businesses can act as lenders, as long as they met the arms-length test.
- Where members have already met their contribution limits, borrowing can be used to add non-contribution funds to the SMSF. However, it must be a genuine borrowing, otherwise may be deemed as a non-concessional contribution.
- Future income and capital gains on underlying assets are taxed concessionally in a SMSF, and may be tax free where the assets are held for pension purposes.
- The loan must be with the fund. There have been some cases where a lender has not been aware that the borrower was a SMSF.
- Loan documentation must meet the regulatory requirements. The ATO guidelines outline what an effective SMSF loan is. It's also important for any bare trust arrangements and loan agreements to be simple and cost effective and be supported by effective ancillary documentation.
- Subject to the treatment of insurance proceeds in the trust deed, the SMSF trustee should consider taking out life, TPD and trauma insurance to pay out the loan in an event that a claim is made.
- The trust deed of the fund must allow the fund to enter into a SMSF loan agreement, otherwise the deed must be properly amended to allow the borrowing.
- Contracts for the acquisition must be in the proper names and at the right time, to avoid double or triple stamp duties occurring.
