Borrowing In Your Superannuation Fund

Borrowing in your Superannuation Fund

Details of the new borrowing law are found in section 67(4A) of the Superannuation Industry (Supervision) Act, 1993. This now provides an exception to the superannuation borrowing restriction.

In simple terms, a superannuation fund trustee can now borrow to acquire a beneficial interest in an asset that is held on trust.

Requirements

·         it is the fund trustee (SMSF) which enters into the borrowing agreement

·         the borrowed money must be applied to the acquisition of an asset other than an asset prohibited by SISA or any other regulation

·         the loan must be a limited recourse loan, so the lender’s security is limited to the assets bought using the loan and in particular doesn’t extend to other assets of the fund

·         the Fund Trustee is not the legal owner of the asset. The asset must be held in trust with the Trustee of the Superfund holding the beneficial interest in the underlying asset. The trust here may be called a custodian trust, debt instrument trust, bare trust or sometimes other names. There is no defined name for this trust under the legislation

·         the Fund Trustee holding the beneficial interest must have the right to acquire legal ownership of the underlying asset upon making one or more payments

·         the underlying asset must not be an in-house asset had the Fund held it directly

Financing

The borrowing arrangement may be entered into with

·         a financial institution

·         a fund member

·         a related party

Please note that it will be important to set commercial terms and rates for related party loans or risk sole purpose or contributions issues. It is possible that the ATO may treat a loan from a related party which is not on commercial terms as a contribution, which may result in the breach of contribution limits and the imposition of additional tax.

Benefits

Taxation

·         a maximum of 10 per cent capital gains tax on the sale of assets held for longer than 12 months and potentially Nil if sold in pension phase

·         maximum of 15 percent tax on rental income

·         salary sacrificing may allow a fund member to effectively receive a tax deduction (potentially at 46.5%) to fund principal and/or interest repayments on the loan

·         interest on the loan is tax deductible therefore reducing contributions tax payable

Superannuation Contributions Cap limits

The government has now capped how much you can contribute to superannuation. Personal contributions are limited to $150,000 per annum or $450,000 over three years. Tax deductible contributions are also limited dependant on your age.

Member lending increases the flow of non-contributions funds into the SMSF which fall outside the excess contributions tax rules. This allows you to get more money into the tax effective system of superannuation.

Other benefits

·         may allow the purchase of larger assets that would be otherwise out of the reach of the trustee

·         member financing – the member may wish to transfer assets they own into the fund utilizing the borrowing rules (eg. business real property)

·         your personal borrowing capacity is not effected

Other Considerations

·         Trust Deed – it is the responsibility of the Trustee of the Fund to ensure the Trust Deed for the Fund permits the fund to borrow money, provided that such borrowing does not breach current legislation. An update to your Trust Deed may be required to satisfy these provisions

·         Investment Strategy – section 52(2)(f) of the SIS provides that the Trustee of a SMSF must formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the Fund including, but limited to cashflow, diversification and the ability to meet liabilities. Consequently, if a SMSF decides to invest in an asset via a complying loan, the Investment Strategy of the Fund may need to be updated to reflect this decision

Conclusion

The recent changes to the SIS Act represent significant opportunities within the superannuation environment. Not withstanding this, it is vitally important the Fund Trustees seek the appropriate accounting, taxation and financial planning advice before entering into such an arrangement.

Click here for an example of how this strategy could work for you.