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.

It’s important to understand more about SMSFs to determine if this option is right for you.

What is an SMSF?

SMSFs are sometimes referred to as ‘do it yourself’ super funds. Like other super funds, SMSFs invest contributions from members, provide benefits to those members on retirement and provide death benefits to beneficiaries in the event of the member’s death.

The principal difference between SMSFs and other types of superannuation funds is that the members of an SMSF are also the trustees, or directors of a corporate trustee. Amongst other things this means they are required to prepare and implement an investment strategy for their fund and manage the payment of benefits.

SMSFs also provide wider investment choice than other super funds, with options such as direct property, managed investments and direct shares included.

The members of an SMSF must appoint approved auditors, and may also choose to involve tax agents, accountants and financial planners. However, the ultimate legal responsibility for the fund’s ongoing compliance rests with the individual trustees.

What are the advantages of SMSFs?

SMSFs offer a range of benefits, including:

• increased control over your retirement funds and how they are invested;
• wider investment choice than public offer funds;
• the scope to use 100% of the fund’s assets to acquire business’s real property and lease it back to the business;
• your SMSF can move with you from job to job;
• may provide a range of options for estate planning and benefit payments.

What are the drawbacks?

• Each trustee bears a high degree of responsibility to ensure that their trustee duties are performed and exercised in the best interests of fund members;
• There is a risk of tax penalties if the fund becomes non-complying;
• Running an SMSF can be demanding and time consuming;
• SMSFs incur a range of extra costs, eg auditing of accounts, tax and regulatory return administration and supervisory levies.

Prestige Wealth Partners can:

• Determine if a self-managed superannuation fund (SMSF) is an appropriate investment structure for you.
• Establish your self managed superannuation fund and arrange for a trust deed to be prepared and a Tax File Number and ABN are registered for the SMSF.
• Prepare and review your fund’s investment strategy taking into account your risk profile, income tax minimisation and estate planning preferences and possibilities.
• Assist you transferring your benefits from your existing superannuation funds or overseas pension accounts into your self managed superannuation fund.
• Help you minimise tax and maximise your superannuation contributions
• Arrange pensions and lump sum payments from your SMSF.
• Keep you informed of changes to relevant legislation and its impact on your self managed fund.
• Refer you to an experienced SMSF with discounted rates

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 Introduction to SMSF Fact Sheet provided by Financial Wisdom or contact Rebecca Newton using the form below.

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To encourage you to save for retirement, the government provides special tax advantages for super investments.

Prestige Wealth Partners can help you maximise your superannuation for retirement whilst minimising your income tax. Superannuation is extremely important for your future quality of life

Superannuation Frequently Asked Questions

• What is superannuation?
• Why is it so important?
• How does superannuation work?
• Who can contribute to superannuation?
• How much super will I need?
• What is the difference between a retail fund and an industry fund?
• What is a self managed superannuation fund (SMSF)?
• What can super funds invest in?
• Is there a limit to the amount of super you can save?
• I have lots of superannuation accounts, how can I consolidate them?
• How is super taxed?
• When can I access my super?

Rebecca Newton Financial Planner understands superannuation

For some answers to the questions above – download the Superannuation Basics Fact Sheet provided by Financial Wisdom – or contact Rebecca Newton using the form below.

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