What are SMSF borrowing rules?

The borrowing rules offer excellent opportunities for SMSFs to maximise earnings by allowing the funds to gear (borrow to invest) into a range of asset classes such as shares, direct property and other allowable assets.

At the same time, the rules do not allow SMSFs to borrow without restriction. For the borrowing to be permitted, it must be established via an arrangement that meets certain conditions. This makes it extremely important that you obtain specialist financial planning advice on your personal circumstances.

What are the borrowing arrangements?

Under the borrowing rules, an SMSF is exempt from the general superannuation borrowing restriction providing the borrowing arrangement ensures:

• Borrowed monies are used to purchase a ‘single acquirable asset’ or: are applied to expenses incurred in borrowing, acquiring, maintaining or repairing the asset, but not to improving the asset are used to refinance a loan.
• The acquirable asset is held on trust so the SMSF trustee receives the beneficial interest in the asset.
• The SMSF trustee has the right to acquire the asset after making one or more payments after receiving the beneficial interest.
• Any rights the lender, or any other person, has under the arrangement are limited to the rights relating to the acquirable asset.
• The acquirable asset is not subject to a charge other than that provided in relation to the borrowing.
• The acquirable asset can only be replaced in accordance with the rules governing replacement assets.

What is a ‘single acquirable asset’?

A single acquirable asset is defined as one that is not money and which the trustee is permitted to acquire under the fund’s rules. The legislation also extends the definition to include a collection of assets that are identical, have the same market value and are seen and treated as a whole.

For example, an SMSF can borrow funds to purchase (and later sell) a parcel of shares of the same class in a single company.

Other examples of a single acquirable asset include:

• a collection of units in a unit trust which have the same fixed rights attached to them
• a property on a single title
• a collection of economically identical commodities.

Replacement asset limitations

While an SMSF can replace an asset which was acquired through a loan (borrowing), it is limited to doing so only in circumstances that involve:

• shares or units in the same company or trust of the same market value
• shares or units in a different company or trust acquired due to a takeover, merger, demerger or restructure
• shares acquired through an instalment receipt arrangement
• certain arrangements relating to stapled securities or the replacement of units in a trust.

A borrowing arrangement that does not include an allowable replacement asset is prohibited and would not meet the requirements of the borrowing exemption.

It is important to note that property cannot be replaced under a borrowing arrangement and that any improvements to the property (regardless of how they are funded) could result in the creation of a replacement asset where the improvement materially alters the character of the property.

What can SMSFs borrow to invest in?

Providing an SMSF complies with its trust deed and all the relevant superannuation rules, it can borrow to invest in a single direct property or a parcel of shares in a single company.

Direct property investments can include residential and commercial property, and under the rules an SMSF can lease the commercial property to a fund member for business use.

Allowing SMSFs to borrow funds to purchase shares broadens the gearing opportunities beyond geared managed funds. At the same time, trustees considering gearing must weigh up the risks and costs of each approach.

While gearing into direct share investments offers potential to increase returns, it could also increase losses if share prices fall. When it comes to cost, an internally geared managed fund may be simpler and cheaper to establish.

Tread carefully

Trustees considering gearing within their SMSF should proceed with caution. Implementing a borrowing arrangement is complex and unless proper care is taken, trustees could end up being penalised for failing the borrowing exception and/or failing to qualify for valuable Capital Gains Tax and stamp duty concessions.

Prestige Wealth Partners can help you

Speak to Rebecca Newton and let Prestige Wealth Partners help you maximise your superannuation opportunities.

For more information about self managed superannuation funds – and any other form of superannuation investment product – please download the Borrowing Rules Fact Sheet provided by Financial Wisdom or contact Rebecca Newton using the form below.

Gearing is the strategy of borrowing money to invest. Just as you take out a loan to buy a home, you can also borrow money to invest in other assets, such as shares, property or managed funds.

Gearing enables you to boost your investment earning power by increasing the amount of money you have available to invest. While investing with someone else’s money sounds like a great strategy (and it can be), there are risks involved, so it’s not suitable for everyone.

Prestige Wealth Partners makes gearing strategies easy to understand and easy to implement.

Generally, to be effective a geared investment should:

• generate a reliable long-term income flow
• generate capital growth that exceeds inflation over the medium to long term
• be highly diversified with a number of individual investments
• be considered for investment time frames of five years or more
• draw on stable and reliable cash flows to meet the pre-tax borrowing costs.

Things to consider about geared investments:

• Who is gearing appropriate for?
• What are the benefits and the risks?
• What is the difference between positive, negative and neutral gearing?
• What is home equity gearing?
• What is margin lending?
• How do I repay a geared investment loan?
• What is a Loan to Value Ratio (LVR)?
• How does gearing affect my tax?

Rebecca Newton Financial Planner has the answers!

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