Borrowing in a Self Managed Superannuation Fund

In recent months there has been a lot of media coverage about the ability of superannuation funds (including self-managed super funds) to borrow money to invest. This has created very high levels of enquiry by super fund members.

By way of background, many superannuation funds have historically invested in financial products known as instalment warrants. These products involve the payment of a deposit followed by the balance being paid at an agreed later date.

The very nature of an instalment warrant means the investor has entered an arrangement with the promoter of the instalment warrant that involves borrowing money.

Under superannuation legislation, superannuation funds are prohibited from borrowing money except is a number of very limited circumstances. In order to cater for borrowings associated with instalment warrants, a new “instalment warrant exemption” was introduced into superannuation law effective from 24th September 2007.

However, the wording of the legislation has resulted in a broader interpretation than was perhaps otherwise intended by the legislators. This has become particularly appealing to people who operate their own self-managed superannuation fund. As the law currently stands, a superannuation fund may now borrow money for the purposes of acquiring assets.

However the scope of the changes in the borrowing rules requires very strict adherence to a number of specific conditions.

In broad terms, the SMSF is able to borrow money to acquire an asset the fund is otherwise able to acquire, provided:

  • The asset to which the borrowings apply are held on trust for the super fund,
  • The super fund has a right to acquire the asset on payment of the final instalment,
  • The lenders recourse is limited to the asset to which the borrowings apply, and not the other assets of the super fund.

Because of the complexity of the rules, advice from a suitably qualified financial planner or accountant experienced in self-managed super funds is essential. For more information contact Christian Tapia on 07 32083888. Christian is an authorised representative of Professional investment Service.

David Maynard, senior accountant for My Tax Zone will guide you through the taxation aspects of self managed super funds.

Source: Professional Investment Services

Copyright 2014. My Tax Zone.