From the Institute of Chartered Accountants

In 2007, legislation was enacted to enable Self Managed Super Funds (SMSFs) to borrow funds to make investments for the retirement of the member/s of the fund. Examples include investments in management funds, shares and direct property (real estate).

When borrowing in SMSFs there are significant rules to be followed including the establishment of a ‘bare’ trustee.  Banks are restricted with respect to the types of loans that can be made to SMSF Trustees and they often require personal guarantees by members of the fund.

In undertaking a borrowing of this nature in your SMSF, you must be aware that because of the complexities involved, it can be a lengthy process.

You will need to ensure the steps required to be undertaken are well planned and coordinated.  A solicitor will need to be involved in the preparation of documentation and, in the case of direct property, a solicitor should be engaged to act and assist in purchasing the property.

For property, banks may require a deposit of around 40 per cent to 50 per cent of the total sum and a personal guarantee from members of the fund. Careful consideration needs to be given if you are contemplating such an arrangement.

Those over the age of 45 should take particular care as there could be equity difficulties if the asset is not paid off before the member’s pension commences. Alternatively, members who are around 40 years of age may find this a good strategic opportunity to acquire assets and have them paid off before commencing their pension.  New real estate also provides the opportunity for capital allowance and depreciation which may assist in the tax effectiveness of the investment within the SMSF.

Talk to your Chartered Accountant for more information.