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Since September 2007, Self-Managed Superannuation Funds (SMSF’s) can obtain finance directly to acquire certain assets. This permission is detailed in Section 67(A) of the Superannuation Industry Supervision Act (SIS) and is known as a limited recourse loan arrangement.
Basically, this section says that the trustee of a super fund can borrow to acquire a single asset. Provided that the asset is help on trust until the borrowings are paid, the only asset to be provided as security for the borrowing is the asset being purchased.
Some important things to consider when looking at this arrangement are:
If an apartment is being purchased with a furniture package, the loan cannot be used to cover the purchase of the furniture under the same trust arrangement as the apartment. It should be removed from the contract and funded from the existing liquidity in the Fund.
Shares must be treated like one asset. That is, purchased together and sold together. If shares in multiple companies are desired, multiple arrangements are also required.
It is possible for the Trustees of the Fund to borrow in their own names and then on-lend that money to the SMSF. This needs to be done with caution, if not done correctly, the super fund could end up paying top marginal tax rate on the income derived.
Personal guarantees are permitted to be given to underwrite the lender’s risk in the borrowing arrangement.
The asset subject to the arrangement is not subject to a charge other than to the lender in respect of the borrowing arrangement itself.
The asset within the arrangement can only be replaced by a different asset in very limited circumstances.
It is very important that the property conveyancing (if applicable) be done correctly as small errors can cost double or even triple stamp duty and the errors may not be picked up until you go to unwind the bare trust relationship. We suggest that you use solicitors who are conversant with these arrangements and not just property transfers.
Trustees can refinance a borrowing including accrued interest if the new borrowing arrangement is over the acquirable asset from the first arrangement.
The following process should be adopted when borrowing through super to purchase a property:
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Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to your circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
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