Borrowing within Superannuation using a Self Managed Superannuation Fund (SMSF)
In September 2007 the Government passed new legislation which relaxed the prohibition on borrowing within superannuation funds.
Generally, you will need to have your own self managed superannuation fund (SMSF) to take full advantage of this change in legislation.
In September 2007 legislation was introduced to clarify the position of a SMSF investing in a financial products known as warrants (which are generally listed in the Australian Stock Exchange). However the legislation didn’t limit the investment to instalment warrants listed on the Australian Stock Exchange. Hence, allowing for instalment warrants to be held over property.
What does this mean?
A Super Fund can now borrow funds to invest in property so long as it is structured in the form of an instalment warrant.
How does it work?
The Super Fund finds a property it wishes to buy.
Then arranges a loan to purchase the property.
The property is purchased in the name of the Trust for the benefit of the super fund.
The Super Fund pays for the property via instalments, including interest on the balance owing to finalise the purchase of the property.
Under a normal warrant structure once the loan is repaid in full the trust would transfer the asset (in this case the property) to the Super Fund. In doing so, one must be careful not to trigger stamp duty and capital gains tax. It maybe the case that exemptions are available so these aren’t payable.
Things to watch out for
The Federal Government is currently carrying out a full review of superannuation including this new piece of legislation. Whilst the current Federal Government did support this legislation last year, they may still revoke it.
Stamp duty and capital gains tax legislation may change before the loan is paid out, hence making the cost of any transfer higher. Remember that a typical property loan is taken out over 20 to 25 years.
The lender only has recourse over the asset directly effected by the loan. That is, no other asset within the fund can be used as security.
The Super Fund’s investment strategy must make provision for the Fund to be allowed to borrow.
The Lender
As the lender cant take security over any other asset within the Fund it is likely that the deposit needed to fund the investment will be high. One lender that has entered this market will only lend up to 60% of the value of the investment.
Insurance
It is prudent for members of the SMSF to have both life, total and permanent disability and income protection insurance on themselves to ensure that the loan can be repaid in the event of a members death or disability.
Australian Taxation Office
ATO has issued a guidance with question and answer paper on this issue. They can be viewed at :
Taxpayer Alert: click here
Q & A: Click here
Disclaimer
The advice provided in this document is general in nature and it does not take into account your needs, objectives or financial situation. You should always take these matters into consideration before making an investment or insurance decision and seek personal advice.
