At one time, an SMSF could not borrow funds to invest in assets. The rules were relaxed in 2007, and have been refined in recent years. It is now possible for an SMSF to borrow to acquire assets – providing certain rules and restrictions are adhered to.

Borrowing or gearing your super into property and shares involves very strict borrowing conditions. It’s called a ‘limited recourse borrowing arrangement’. You can only purchase a single asset with a limited recourse borrowing arrangement. For example, a residential or commercial property.

You should assess whether the investment is consistent with the investment strategy and risk profile of the fund.

Some good reasons for SMSF borrowing

1. Your SMSF has more money invested than if it hadn’t borrowed and therefore could potentially benefit from higher investment income and capital growth.
2. Investment income is taxed at 15% maximum (compared to up to 45% outside of superannuation).
3. Capital gains tax is 15% maximum (compared to up to 45% outside of superannuation) with a one-third discount if held 12 months or more.
4. The asset is fully protected from future litigation & bankruptcy you or your business may face (as long as it was not placed in your SMSF for protection against a specific litigation or bankruptcy you were aware of).

Some challenges with borrowing on an SMSF

1. Increased level of risk due to borrowed investment funds.
2. The cost of borrowing is deductible at 15% (compared to up to 45% if borrowing used outside of superannuation).
3. Additional administration is required for SMSF trustees.
4. There is a cost to set up a limited recourse borrowing arrangement and the bare trust.
5. Possible additional costs and tax consequences if asset is sold prior to full repayment of loan.

SMSF borrowing may not be entirely straightforward, so it’s important to seek professional advice regarding the rules, and also with regard to any associated taxation implications. Please note that the information we provide here is not advice but general information only. The ATO also provides guidance on limited recourse borrowing arrangements on its website.

Have a question about SMSF Lending that you’d like answered? We’d love to hear from you. Please go to www.smefundinghub.com and provide your contact details. Alternatively, contact a broker at info@smefundinghub.com.

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisers. Although every effort has been made to verify the accuracy of the information, we disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.

Source: Australian Unity