Announcement posted by MSI Global Alliance 18 Jun 2014
Borrowing within a Self-Managed Superannuation Fund “SMSF”
has become increasingly popular. In fact, prior to 2007 borrowing within
Superannuation was not allowed but in September 2007 the law was amended to
allow SMSF’s to borrow and over the years this law has been further amended.
Why borrow within your
SMSF?
Due to the nature of the regulations borrowing within
Superannuation is best suited for the purchase of direct property, either
commercial or residential. SMSF trustees who also operate a business can use
their existing superannuation balances together with borrowing to purchase the
premises from which their business is conducted. This is appealing to many
small business owners as rent is now paid to their SMSF as the new landlord. The business receives a tax deduction for the
market value rent and the SMSF receives the rent as investment income and is
either taxed at a concessional rate of 15% or 0% if the fund is in pension
phase.
A further temptation is the capital gains tax savings on the
future sale of the property. When the property is sold the capital gain
realised is taxed at a maximum of 10% within a SMSF during accumulation phase
or potentially tax free if sold while in pension phase.
How to ensure legislative
requirements of the arrangements are met?
The borrowing arrangement must have the following features:
·
Used to purchase a single
acquirable asset.
·
The asset is held in
trust so that the SMSF trustee receives a beneficial interest and a right to
acquire the legal ownership of the asset through the repayment of instalments.
·
The lenders recourse
against the SMSF trustee in the event of default on the borrowing is limited to
rights relating to the particular asset itself.
·
The asset must be one
which the SMSF trustee is permitted to invest in under the Superannuation
Industry (Supervision) Act “SIS Act”.
What are the risks?
Borrowing arrangements within Superannuation are subject to
greater regulatory control than similar arrangements outside Superannuation. Risks
that relate to Superannuation borrowing in particular include compliance and
legislative risk, market risk, liquidity risk and credit risk.
There are also specific rules around improvements to the
particular asset within the SMSF as well as refinancing the loan. SMSF trustees
should also consider the effect of death or incapacity of the members on
servicing the loan.
Should further advice be
sought?
It is critical that trustees seek expert financial and/or
legal advice before embarking on borrowing within their SMSF. It is important
to note that personal advice with respect to SMSF’s and in particular limited
recourse loans are considered a financial product and therefore only
appropriately qualified advisers are eligible to provide advice in relation to their
structure.
Maree Schneiders
StrategyCo Pty Ltd
M: +61 (0) 411 446 484
E: maree@strategyco.net
W: www.strategyco.net
About MSI
MSI Global Alliance (MSI) is a top ranked,
international association of independent accountancy and law firms. In
Australia and New Zealand, MSI consists of 15 independent legal and accounting
firms that provide specialist services to local and overseas businesses and
form part of the larger MSI Global Alliance group with over 250 member
firms across 105 countries worldwide.
For more information, visit MSI Global
Alliance – Aust & NZ
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