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Smart Investing
Borrowing in a SMSF
 January 7, 2008
Robin Bowerman
The recent amendments to superannuation law that allow SMSFs to borrow to invest provided stringent conditions are met provide more clarity for a fundamental piece of superannuation law.
As all fund trustees should know, superannuation law generally bars SMSFs from borrowing to invest.
And fund trustees are reminded again and again – particularly by the tax office as regulator of self-managed super – about this ban. It is as fundamental for SMSFs as the law that fund assets must be used for the sole purpose of providing for members’ retirement and death benefits.
Yet many trustees would have been confused about the promotion in recent years of instalment warrants as a way for self-managed funds to effectively borrow to invest.
Indeed, the tax office and the Australian Prudential Regulatory Authority (APRA) were disturbed by the apparent contradiction and before the recent borrowing amendments had given their views that the use of traditional instalment warrants by a SMSF was a breach of the borrowing ban.
An instalment warrant, in its most simple form, is commonly understood to be an arrangement that allows a borrower to acquire an asset through the payment of instalments.
The recent borrowing amendments, in force from September 24, 2007, clearly allow a SMSF to borrow to invest (including through instalment warrants) provided stringent rules are met that include: the asset must be held in a special trust until the final payment or instalment is made and, most importantly, a lender’s recourse in the event of a default is limited to its rights in relation to the geared asset.
In other words, a lender cannot make a claim against the other assets of the super fund in the event of a default. (Read the ATO’s summary of the new borrowing rules).
By the way, the general ban on borrowing to invest by a SMSF remains in force. If a fund borrows, it must, I repeat, abide by the new conditions.
Clarity in superannuation law is crucial, particularly as most of the trustees of Australia’s 360,000-plus SMSFs are not tax or legal professionals but are extremely busy people such as business owners, executives and very active retirees.
But clarity in the law is one thing. It is another issue whether a fund should borrow to invest to buy investments such as shares and real estate.
More articles from this edition of CompareShares:
Stock picks: Fund Manager Stock Picks - Siemens and Standard Chartered Bank
Stocks: 2008 sector & stock outlook
Stocks: 2008 sector & stock outlook part 2 - sector and stock picks
Investing: Gangbuster returns from Aussie microcaps
Superannuation: Borrowing in a SMSF
Commodities: Still bullish on global commodities story
SMSFs: Be wary of promoters - instalment warrants in SMSFs
Markets: Wall St skids amid recession fears
Rates: Major banks may follow NAB rate rise
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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