Borrowing in super
Super funds can borrow in limited circumstances using "Instalment Warrant" type arrangements.
Subject to meeting certain conditions under s67 Superannuation Industry Supervisory Act 1993 (SIS), a SMSF can borrow to acquire assets such as residential or commercial property and shares. Any interest paid on borrowings will be tax deductible to the fund. This opens up a whole new range of geared investment opportunities for SMSFs. Any leveraged investment strategy must be made in accordance with the SMSF deed and comply with the funds written investment strategy. It also must not breach the underlying sole purpose of the fund being to provide retirement benefits to its members and their dependents. A fund may borrow from an arms length financier or a related party, subject to certain restrictions.
To qualify as an allowable borrowing under the laws the following key conditions must be satisfied:
- The SMSF would not be prohibited from investing in that asset directly (i.e. must not be an in-house asset or assets acquired from members of the SMSF apart from business real property or listed shares)
- The asset is held in a special security trust so that the SMSF acquires a beneficial interest in the asset
- The SMSF has a right to acquire, but is not obligated to acquire legal ownership of the asset by making one or more future payments
- The loan is limited recourse which means that the lenders rights for default on borrowing and any interest owing are limited to the underlying asset only.
If you would like to discuss whether your SMSF can borrow or to learn more about facilities suitable for borrowing in super, please contact Marc Peskett or Russell Sharp by calling us on 03 9869 5900 or email us for more information.