Borrowing to invest with your SMSF – Part 2

Criteria for borrowing within an SMSF

For the trustee of an SMSF to be permitted to borrow for investment purposes the borrowing must be set up under an arrangement that satisfies certain criteria. These include that:

  • The loan is used to purchase an allowable asset under the super investment rules
  • The loan is set up on a limited recourse basis so that the lender’s recourse is limited to the asset acquired with the borrowing.
  • The legal title of the asset is held on trust for the SMSF until the loan is repaid
  • The SMSF is the beneficial owner of the asset and request legal ownership of the asset be transferred back to the fund once the loan is repaid.

Under this type of arrangement the SMSF is generally entitled to any income generated by the asset, which could then be used to help repay the loan. The SMSF will also get the benefit of any change in value of the asset.

What assets can be purchased?

In general, borrowing can be used to acquire any single asset that a trustee is not otherwise prohibited from purchasing. The only requirement is that the asset must be a single asset, such as:

  • A block of land on a single title
  • A collection of shares of the same class in the same company
  • A collection of units in a unit trust.

Where the asset consists of multiple assets, such as a portfolio of different shares or a number of properties on multiple titles, a separate borrowing arrangement will be generally be required for each separate asset.

Key risks of a borrowing strategy

Investment risk

Borrowing to invest increases potential losses as well as gains. There is a risk that you are not able to service the loan which would result in the strategy having to be reversed and you losing money. Trustees should therefore ensure that a borrowing to invest strategy is appropriate given the fund’s circumstances and risk profile.

Legislative risk

The Government has committed to review the use and take up of superannuation borrowing rules. Therefore, there is always the risk that the Government could amend the rules to restrict the ability of trustees to undertake certain borrowing activities in the future.

How your financial advisor can help

If you’re interested in borrowing to invest within your SMSF, speak to your Roberts and Morrow Financial Planning financial adviser. They can help in a number of ways including:

  • Providing advice on the suitability of setting up a borrowing arrangement in a SMSF and the types of assets that can be acquired under a borrowing arrangement.
  • Reviewing and updating the SMSF’s existing investment strategy.
  • Facilitating the review of the SMSF’s trust deed and the establishment of the required trust structures and arrangements.
  • Reviewing the SMSF’s insurance needs, given that it now has liabilities that may need to be insured to protect against loss in the event of the death or disablement of a member.

General Advice Warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.

Recent Articles

Proposed broadening of NSW Landholder Duty

02nd December 2019

Landholder duty only applies to relevant acquisitions of shares in companies or units in unit trusts that hold interests... Read More

Discretionary trusts – Take action now to avoid extra land tax and stamp duty charges!

22nd November 2019

In NSW the extra 8% stamp duty and extra 2% land tax surcharges for foreign persons, trusts and companies... Read More

Update on drought assistance

21st November 2019

The NSW Government Department of Primary Industries shares regular updates on drought assistance initiatives as they become available. Click... Read More

We've got an app!

21st November 2019

Roberts & Morrow has launched an app available for download from the App Store for the iPhone/iPad or from... Read More