Debt recycling into super?

Hi taxperts

Being self employed i need to pay my own super. Because strictly speaking this is an income producing investment, can i debt recycle my PPOR loan? I'm thinking the purpose would be investment but some how it seems to good to be true.

What an I missing?

 

Hi @Jess Peletier

Contributing funds you have already paid tax on would not be tax efficient whereas paying the SGC from the company is tax-free... till it lands in the smsf where the smsf is taxed 15% on profits.

Perhaps you talking about becoming a lender to your smsf by using equity release funds from your ppor?

 

You could lend money to your super fund. The super then uses that money to invest and pays you interest on the loan you made to the fund.

 

Interest on a loan taken out to contribute into super is not deductible.
The company could potentially claim interest for business expenses though.

 

Oh this might work.

Super is not smsf, but if i were to lend the biz the funds to pay the super that would be deductible? Trying to work out if that's tax effective or not...

 

It could be to the company, not to you unless the company was paying you more interest than you claim

 

Could you not just do a capital introduced contribution to the company and repay it when the business is able? Not sure on this if it is done at a time other than business start-up @Terry_w ? I suppose this is no good seeing as you'd be paying interest in your own name and not getting reimbursed though.

 

Capital would be contributed by subscribing for shares, or gifting, so potentially doable. But to claim interest there has to be an expectation of dividends. Also existing shareholder rights are diminished so lots of complex issues.

 

A company may borrow money to pay operating expenses. However a self employed person, trust etc may encounter issues and be unable to borrow money to pay super. Like borrowing to pay tax - Isnt always deductible.

 

A super fund cannot borrow from a member or an associate (VERY complex if it is permitted and almost impossible). It would likely be caught as a prohibited loan OR a prohibited contribution OR become preserved and be incapable of being repaid.

 

Another option : A company or trust can borrow $$$ to pay a dividend / distribution (respectively) Then the shareholder/beneficiary could use the proceeds to make a concessional contribution.

Borrowing to pay super etc is regressive however and may be best avoided.

 

I've got a statement of advice from a very well qualified source that details a strategy of members lending to a fund and being paid interest on that loan. I also know quite a few people who have received similar advice for several years from alternate but also qualified sources. I believe it's held up to audits. There definitely are a few things that must be done, but I'm quite certain it's possible and not particularly difficult.

I don't pretend to be qualified to give this as advice, that must come from a planner and it needs to be tailored to the members circumstances. This is not a part of super you want to risk on someone's opinion. A financial plan is definitely required, as well as appropriate oversight and ongoing auditing of the SMSF.

 

A fund can borrow from a member.

 

Superannuation Industry (Supervision) Act 1993 s67 contains the general prohibition that a fund cannot borrow or maintain a borrowing except if permitted.

Permitted loans include:
s67(2) a short term funding of securities subject to 10% limit and 90 days when the fund needs to make a payment to a beneficiary
s67(3) a short term funding of other matters (ie settlement of property etc) also subject to limits ie unforseen and 7 days and 10% limit
s67A...Limited recourse borrowing. However all of the SISA and also ATO requirements must be met if the loan is not from a licensed financial institution.

Related borrowings can be included in this however the conditions are VERY complex and onerous. If a loan is being contemplated that "could" be considered not on arms length terms or by a non licensed lender then only when a competent lawyer (and not a financial adviser or tax adviser) confirms compliance with PCG 2016/5 and TD 2016/16 should anyone depart from the general view that borrowings are prohibited. All this should be given advice long before audit !

One of the greatest risks with permitted borrowings with associates is the diligent maintenance requirements. Many related party loans can be at peril if this is not followed strictly.

I recently (18mths ago) saw what appeared sound advice for a borrowing. It relied on the related lender not dying. On their death the sole beneficiary and executor was the member. The lender had included a clause that forgave the debt on their death. The ATO agreed that the borrowing was compliant but would not be on the death of the lender and could not be refinanced by any lenders as the property was not one a bank would lend on. A major omission !! On that basis the auditor reported the matter to the ATO. The ATO view was that the fund was at risk but not non-compliant (yet). The member was not amused to find this "sound" strategy failed. (Fine print said - Get a SMSF Ruling...Guess who didnt)

As a general rule a fund cannot just borrow from a member or associate. There are also serious issues to be considered which may require further legal advice. eg inability to refinance, change of residency, death of a member or the lender and many other matters that can place a legit arrangement at peril.

 

So a fund could borrow from a related member?

 

Other than being a bit confused about precisely who is who in this fun game of Cluedo, I do wonder if someone in the SMSF died, why was there not adequate life insurance to just pay out the debt so the problem goes away? This is the common-sense approach when getting a SMSF loan from a bank... I seem to recall something about SMSF bank loans having to be paid out within 90 days of the death of a member... almost unachievable timeframe to grieve, get in touch with SMSF accountant of said deceased person, make a plan, list property for sale, find a buyer, and settle, all within 90 days. Thus the importance of life insurance. Claim on the policy, get paid out, pay out the debt and then sell SMSF property and wrap up the SMSF at a leisurely pace.

 

Death is a real problem - especially to the deceased!

If a fund has 2 members, A and B and B dies and B has life insurance, the insurance will be part of B's death benefit amounts and it would need to be paid out of the fund as soon as possible. So it could not be directly used to pay off the loan of the property. But, the death benefits may go to A who may then make a after tax contribution or bring in other members to the fund.

 

Looks like I need to ask my estate lawyer few questions...?
Partner has LI in SMSF but each year I reduce SI as:
- stepped premium gets exponentially expensive
- only short term towards 60 (possible transition to full pension mode from accumulation)
- each member in excess of $1.6M tax free limits so what's the point of LI now
The query I have, is say partner dies, no insurance or insufficient SI to cover existing SMSF loans (both LRBAs and Bank loans)? Do I have only 90 days to pay off ALL those loans, from your comments and understanding above?
I suppose have option to liquidate other assets in SMSF like IPOs but I wasn't aware I had to repay the debts within 90 days (even on self sustaining portfolio - low LVRs and IPs could be repaying the loans)?

 

I just realised the 90 days refers to short term member borrowing, not to LRBAs or bank loans, am I correct there?

 

The SIS Act says, from memory, the death benefit has to be paid out as soon as possible. ATO interpret this to be 6 months or so.

What JacM was referring to was, I think, the contractual obligation with the banks. A individual member will be acting as guarantor for the loan of the SMSF trustee. Death of a guarantor would be a default under the loan agreement and may mean the loan has to be re-applied for with new guarantors.

You would have to read the specific contracts you and the SMSF have entered into.