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Borrowing through SMSF

Borrowing through SMSF
In years gone by, SMSFs were unable to borrow money for the purpose of purchasing an investment such as property or shares. However, since 2007 superannuation laws have allowed an SMSF to borrow money in order to purchase an investment asset, as long as a strict set of rules are followed.

Borrowing Money
Under the superannuation borrowing rules, an SMSF can borrow money to buy any type of asset that it is otherwise able to invest in. This includes property, both residential and commercial, as well as shares and managed funds – however the usual superannuation rules continue to apply where the fund is purchasing an asset from a related party.
While the rules do not restrict the type of asset that can be purchased, due to the requirements under the superannuation borrowing rules – referred to as Limited Recourse Borrowing Arrangements, SMSFs have primarily borrowed money to purchase property investments.

Why borrow through SMSF?
In the past, SMSF trustees may have found it difficult to consider direct property investments as they may not have had sufficient funds available to buy the property outright.

Similarly, where an SMSF may have had sufficient funds, it would often have resulted in a significant portion of the fund’s assets being invested in direct property which impacted on the fund’s ability to adequately diversify its investments. As such, the ability to borrow through an SMSF can assist the fund to buy direct property, catering for both of these situations. If you already own business premises, this ability to borrow can also help to facilitate the transfer of these premises into your SMSF, where appropriate.

Finally, when you borrow money to purchase an investment in your own name, you will generally receive a tax deduction for any interest you pay on this loan. But you will not receive a tax deduction on principal repayments. Where an SMSF borrows money, it is responsible for making loan repayments. However, in order to make these loan repayments, the fund will use its investment earnings (e.g. rent or dividends), and/or contributions that you make to your fund. So, if you are making fully tax deductible contributions into your fund, either directly or through your business, and these contributions are being used by your fund to make principal and interest loan repayments – the result is similar to receiving a tax deduction for principal loan repayments.

Should you decide to borrow through your SMSF, an appropriate exit strategy is critical. As part of an exit strategy insurance, such as life and disability cover, can play an integral role in ensuring your fund has the necessary resources to repay outstanding loans should something unexpected occur.
Equally, general insurance is important in protecting the asset itself. For example, if property is destroyed, insurance proceeds can be used to repay any outstanding loan amount, avoiding the likelihood of lenders looking to take action on personal guarantees.

In the end, there are a number of complexities when it comes to matters concerning stamp duty and other taxes that have not been discussed here. To avoid falling into any unpleasant traps, it is important that you seek advice before proceeding to ensure that you follow the right path to success Our mortgage brokers at Select Advice mortgages are experienced in SMSF lending and would help you to set up the SMSF in the correct way, potentially saving you $000 in tax and compliance cost, call them for a free consultation to see how they can help