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Welcome back everyone. In the sixth and final part of my blog series, I want to discuss something that affects all of our financial journeys: Superannuation. Perhaps you’re concerned about your retirement savings? Or maybe uncertain about how to make the most .....
The primary difference between SMSFs (self-managed super funds) and other superannuation funds is that SMSF members are not just members; they’re also trustees of the fund. The sole purpose of the trust is to provide retirement income for the members or a death benefit for their heirs.
There are some additional benefits to being a member of a SMSF, and one of them is having the ability to borrow money on a limited basis within the SMSF. This strategy allows you to leverage your existing assets to invest in additional assets, like property.
In September of 2007, amendments to the Superannuation Industry Act were made that allowed SMSFs to borrow money on a limited basis for the purchase of an asset within a self-managed super fund. Known as Instalment Warrant Arrangements, these lending arrangements enable an SMSF to make an initial payment on the purchase price of an asset like property, borrow the balance of the purchase price from a lender, and repay the loan through instalments until the asset is fully paid off.
Under the September 2007 changes, a lender could be a financial services provider like a bank, a person or company known to the SMSF trustee, or even the SMSF trustee. If, during the course of the loan, the SMSF defaults, the lender only has recourse to the underlying asset.
As you can see, SMSFs and instalment warrant arrangements offer lots of opportunities for investors to leverage their assets and grow their wealth. Knowing how to go about securing a loan and under what circumstances it could help you to achieve your financial goals are key to your success. Speaking with your wealth adviser about these issues will help you know how to move forward.
In this post, however, we’ll discuss some loan structural elements that could be helpful to your overall financial goals. Consider how each one might fit into your retirement planning, and then talk over your plan with an expert.
The borrowed money has to be used to purchase an asset that the SMSF is not prohibited from acquiring. Legislative requirements mandate that the asset pass the sole purpose test, which ensures that a super fund is maintained for the purpose of providing benefits to members upon retirement or when the member dies. Some restrictions apply to assets that are acquired from a related party or from assets considered to be in-house.
In order to legally acquire title, the SMSF needs to acquire ownership of the asset by making at least one payment after acquiring beneficial interest.
During the loan repayment period, the SMSF can only have a beneficial interest in the asset, and therefore, it must be held in a trust that is separate from the SMSF. This trust, called a custodian trust or bare trust, has some specific rules of its own. Ask your wealth adviser about these rules.
If the SMSF defaults on the borrowing, the lender’s right to recover money is limited to re-possessing or disposing of the acquired asset. Other assets in the fund are not available for repayment of the loan.
In most cases, the following steps should be undertaken as you work toward securing a SMSF borrowing arrangement:
1. Find the property you want your SMSF to purchase.
2. Seek pre-approval for the loan from an approved loan provider.
3. Designate a trustee for the Bare Trust.
4. Complete the required documentation for the SMSF to commence the borrowing.
5. Sign the contract as required by your Revenue Office.
6. Settle the property. The Bare Trustee should be listed as the holder of the title.
As you can see, using your SMSF to purchase an asset can open up new opportunities for your financial future. Talk with your wealth adviser about whether or not such a strategy will enhance your retirement plan.
To set up a time to speak with an adviser, reach out to us at Altus Financial. Your financial life is one-of-a-kind and requires a customised approach in order to make the most of your time and resources. We look forward to helping you achieve your goals.
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