BORROWING IN A SELF MANAGED SUPER FUND
- Written by Melanie Toye, March 17, 2013
Are you looking at borrowing in a self managed super fund (SMSF)? A SMSF is used to build your own retirement fund rather than have an expert invest for you. You can borrow money in a SMSF to acquire assets as part of your investment strategy. Tax benefits may also be available.
In some cases you may be close to retirement age yet looking to borrow. This will be acknowledged in the approval process, to work out how long can you pay off a loan, taking into account when your personal income and super pay outs come to an end. You may not be discounted for approval of a loan, however the loan term may be shortened and your borrowing power may be a lesser amount than you sought out for.
There are multiple factors that come into play when applying for a loan for your SMSF. It is always recommended to speak with a professional who has the knowledge to assist with your individual circumstance. A major point to consider before borrowing is working out if you can repay the loan. Borrowing in a SMSF is money borrowed from a limited recourse loan. What this means is the trustee purchases an asset to be held in a separate trust. This provides security against the other assets in the SMSF if the loan defaults, as the lender cannot claim on any other assets in the SMSF. And returns earned from the asset go to the SMSF trustee.
When looking to purchase an investment, note there are restrictions in place that need to be complied with:
- Make your investments on a commercial, 'arm's length' basis and don't buy assets from, or lend money to, fund members or other related parties.
- Any time your SMSF makes an investment, it needs to be made and maintained on a strict commercial basis. This is what is known as an 'arm's length investment'.
- The purchase and sale price of the SMSF assets should always reﬂect a true market value for the asset, and the income from assets held by your SMSF should always reﬂect a true market rate of return.
Unless an exception applies, trustees generally can't:
- lend the SMSF money or provide financial assistance to members and their relatives
- acquire assets from related parties of the fund
- borrow money on the SMSF’s behalf
- lend to, invest in or lease to a related party of the fund, more than 5% of the fund's total assets
There are high penalties to pay if you go against the rulings of the Australian Taxation Office and the superannuation laws, so it is imperative you seek the right advice as to how much borrowing capacity you may have available and/or discuss strategies in the type of investment you are seeking.
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