Fortunity - Value Creation, Erina NSW

Borrowing rules have changed for Self Managed Super Funds

There are many complex rules relating to a Self Managed Superannuation Fund (SMSF) being able to borrow to invest funds for the benefit of members. New legislation has recently been passed (effective 6 July 2010) clarifying a number of these rules that were previously open to different interpretations.

The new legislation covers six main areas:

1. Changes in terminology
The term ‘instalment warrants’ has essentially been scrapped in favour of ‘limited recourse borrowing arrangements’.

2. Definition of ‘single acquirable asset’
Only a single asset can be acquired under each borrowing arrangement. A single asset may be one investment such as a property or a number of identical assets with the same market value such as units in a managed fund or shares in the same company. Prohibited assets under this rule include shares in multiple companies and multiple properties (eg, apartments in the same complex or even a car parking space on a separate title).

3. Refinancing
Refinancing is now expressly allowable. This is good news as the previous legislation was being interpreted as not allowing refinancing, leaving trustees at the mercy of lenders.

4. Property repairs allowable
It is now possible for borrowed money to be used to pay for repairs and maintenance, but not improvements.

5. Guarantees
Different lenders have had different views on whether personal guarantees were allowed. The new legislation clarifies that personal guarantees are allowable provided certain criteria are met.

6. Replacement assets
Once a borrowing arrangement is in place, there are only very limited circumstances when the asset purchased can be replaced under the same arrangement. One example is with listed company shares in the event of a takeover.

Although there are plenty of rules to comply with, borrowing within super can be an ideal way to boost the assets of your fund if done cautiously.

Using the fund’s existing cash as a deposit and using a borrowing arrangement, a more valuable property can be acquired than otherwise would be possible. Providing the property increases in value at a greater pace than the interest you are paying on the loan, the fund will grow faster.

This can work extremely well for business owners wanting to buy their premises when they don’t yet have enough in their super fund to buy it outright. There are set-up costs involved and the loan interest rate is generally higher than for an individual, however the benefits could be substantial.

All the other benefits of super will also be available such as tax-free pensions for those over age 60 and no capital gains tax on assets sold after the fund commences paying pensions.

Fortunity can assist you by assessing whether a superannuation fund borrowing arrangement would be suitable for your needs. Call 4304 8888 or email info@fortunity.com.au for more information.