Borrowing Through Self Managed Super Funds (SMSF)

Self managed super funds (SMSF) are becoming very popular in the current economic climate where retail super funds are struggling to perform to client expectations.  You will get the same taxation benefits with a SMSF as in a retail super fund, but you have control of the fund.  There are very strict rules which must be followed by SMSF trustees.  Setting up a SMSF can be confusing and you should consult both a lawyer and an accountant before considering whether it is right for you.  Most accountants recommend that you have at least $200,000 in super savings before you entertain the idea of setting up a SMSF.

Many people know that SMSFs can purchase commercial and residential properties (with some exceptions).  However many people do not realise that SMSFs can borrow from financial institutions, or related parties, to assist in purchasing property.  Changes to superannuation legislation in 2007 made this possible.  Since this time, most of the banks have slowly warmed to the concept, however there is very little variety when it comes to loan products.  Most banks are very particular (mostly due to the legislation regulating the industry) about how they lend to SMSFs.  If you have available funds in another related entity, such as a family trust or company, that related entity can become the “bank” and lend to your SMSF, thereby obtaining a double benefit for you and your entity.

When a SMSF borrows money, it will be required to establish what is commonly referred to as a “bare trust”.  This is a special purpose trust which holds the property being purchased on trust for the SMSF.  Whilst this may seem cumbersome, the bare trust serves a very important purpose.  The reason for the bare trust is that there must be a level of protection between the lender and the SMSF.  In the event of the SMSF defaulting, this prevents the lender from getting to the assets of the SMSF other than those which were secured, thereby preserving the other SMSF assets.  The Government has purposely legislated this way to ensure that members of the SMSF do not lose their entire retirement fund in the event that the investment turns sour.

While there is some expense involved in setting up SMSFs and bare trusts, the long term taxation benefits often outweigh the short term set up costs.  Buying assets through a SMSF also adds a layer of asset protection in many cases.  However, it is strongly recommended that you consult a lawyer and accountant before you decide whether to set up any SMSF or to borrow money through an already existing SMSF.

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