You are here: News > Borrowing in a Self Managed Super Fund

Borrowing in a Self Managed Super Fund (SMSF)

Until recently there were very strict rules on a SMSF being able to borrow to invest funds for the retirement of the member of the fund.

However, the rules have changed!!!

Following recent changes in legislation, super fund trustees can generally use borrowed monies to acquire any asset they would be permitted to invest in directly.  Examples include managed funds, shares and direct property.

When deciding whether the fund should borrow to invest in these or other eligible assets, the trustees should consider a range of factors, including the expected investment returns and relevant borrowing costs, such as loan interest.

Don't just jump in though, as the rules are still fairly strict.

These rules include;

• The asset is held in trust so the fund acquires a beneficial interest;
• Security can only be given over the asset being bought;
• Other assets of the Super Fund cannot be used as security, so as to ensure that other assets of the fund are not at risk.

Investment options through borrowings include;

• Share warrants (loans), which are quite simple and inexpensive but are only available for the top 200 companies and normally a 50% deposit is required;
• Real Estate (if it is your thing it's a great way to go) - banks will most likely require the deposit to be much higher than if you were buying it in your own name, possibly 30% to 50%, and a personal guarantee from the beneficiaries of the Super Fund. There is a strict protocol for doing this, including requiring a separate trust to be set up, all of which Cliftons can arrange for you.

Deposits can be from funds already in super, meaning that if you are on wages and the boss is paying super into a super fund, you can establish your own Self Managed Superannuation Fund (SMSF), roll the amounts over to your SMSF and use those funds as a deposit on the property you want to buy.

This structure also lets you pay less tax on your loan principal repayments.  Apart from having your employer make their 9% compulsory contributions to your SMSF, you could also salary sacrifice additional amounts into your SMSF to pay off the loan quicker.  This way you are only paying 15% tax on the principal loan repayments instead of the 31.5% to 46.5% at your marginal tax rates.  You are in effect reducing the loan in pre-tax rather than after-tax dollars.

With a higher deposit and additional funds from salary sacrificing, the property will quickly be running at a profit, with the net taxable income is taxed at only 15%.  The property moves from being negatively geared to being positively geared.  And imagine how many positively geard properties you can afford, as additional dollars are not required to meet the difference between repayments and rental income.

Future Capital Gains Tax reduces to 0% where you don't sell the property until after you retire.  Recent law changes to tax on SMSF assets means that once the SMSF is in pension phase, any capital gain on sale of assets is disregarded, resulting in No TAX.  If you sell before you retire then your SMSF would pay a discounted tax of 10% on the gain, compared to 15% to 23% discounted tax if bought in your own name.

There is, as always, a Disadvantage.  In this case please remember that the funds in your SMSF cannot be accessed for private use until after you have retired, so this is a long-term retirement investment strategy.

Please note that Cliftons is not an AFS Licence holder, and therefore cannot offer specific financial and investment advise.  Information given here is general accounting and taxation advice only and does not constitute financial or investment advice in any way.  We are not recommending investments, but if you want to control of your own investments for your retirement then a SMSF can be a great way to go.

Interested??  Contact Us.