Borrowing to invest within a Self-Managed Superannuation Fund (SMSF) has the potential to boost your Super and help you reach your retirement goals sooner. Legislative changes introduced in September 2007 allowed gearing within SMSF’s – meaning it is now possible to borrow to invest in a broad range of investments within a SMSF.
There are a number of important advantages for a SMSF trustee that successfully carries out a borrowing arrangement to acquire shares, residential property or commercial property:
It maximises the wealth effect in the SMSF in times when assets of the fund are rising. However care should be had in falling markets – although there is the benefit that there are no margin calls due to the non-recourse nature of any loan.
The borrowing can be for a short period or for a period of up to 20+ years (if related party financing is used). This allows the loan to be structured to the underlying circumstances of the fund members.
Members and related businesses can act as lenders provided that all lending is at arm’s length. It increases the flow of non-contribution style funds into the SMSF particularly where the members of the fund have used up their contributions capacity.
Future income and capital gains on underlying assets are taxed concessionally in a SMSF and may even be tax free where the assets are held for pension purposes.
The Process and How It Works
The following diagram illustrates how a typical borrowing arrangement works:
The steps required for borrowing within a SMSF
Discuss the suitability of a borrowing strategy with your Financial Adviser
Identify the Single Acquirable Asset/Property to be acquired
Determine who the Lender will be & what specific requirements they have
Prepare Super Fund Documentation
Execute the Documentation Correctly
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This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.
All financial planning and risk insurance advice is provided by Consultum Financial Advisers AFSL 230323.