Borrowing in a SMSF - ARW warns against it
Whilst there is currently alot of media & advertising promoting recent legislation that allows for SMSFs to borrow to purchase a house, ARW warns against it.
Below is a summary of the legislation as it currently stands but from our experience we expect this loophole to close as soon as the first Federal Budget of the new Treasurer in May. As there are high costs associated with buying & selling of properties we feel that any reversal of the legislation will have severe impact on the net return of SMSFs.
An Instalment Warrant has been an effective way to purchase shares without having to pay the full capital amount upfront, whilst still enjoying the benefits of full ownership.
It was previously viewed that this type of investment was a breach of the borrowing rules in the Superannuation Industry (Supervision) Act 1993 (Cwlth). However, the government saw this as a flaw, and amended the SIS Act on the 24 September 2007 to allow this form of borrowing.
The change in legislation meant the term ‘Instalment Warrant’ needed defining. Rather than defining this term, the government defined the allowable borrowing structure, meaning the term ‘Instalment Warrant’ was much broader than initially anticipated, giving a self managed super fund (SMSF) the ability to borrow in order to purchase other asset types such as real property.
A SMSF has always been an effective investment vehicle due to its asset protection and tax advantages, but the new ‘Instalment Warrant’ will mean the SMSF industry will be able to become an even more formidable investment vehicle creating more investment options for the trustees.
With the introduction of the ‘Instalment Warrant’ arrangements, structure is a vital component that must be considered. To ensure the complying status of the SMSF, it is imperative that appropriate advice is sought in this area.
