Loan Tip: SMSFs Borrowing to Invest

Discussion in 'Loans & Mortgage Brokers' started by Terry_w, 25th Mar, 2022.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The starting point, with superfunds, is that they are prohibited from borrowing.

    This is because of section 67 of the SIS Act.

    SUPERANNUATION INDUSTRY (SUPERVISION) ACT 1993 - SECT 67 Borrowing


    However, a limited exemption was introduced, a number of years ago, to allow a SMSF to borrow under very limited circumstances.

    Section 67A was inserted into the SIS Act to allow this

    (Incidentally you know a section of an Act is a later addition when it has a letter after the number 67A in this case because they already had a section 68).

    SUPERANNUATION INDUSTRY (SUPERVISION) ACT 1993 - SECT 67A Limited recourse borrowing arrangements


    The conditions where a SMSF is permitted to borrow are situations where:

    - The money is used to acquire a ‘single acquirable asset’

    - That asset is held on trust so the SMSF acquires a beneficial interest in the asset;

    - The SMSF trustee has the right to acquire legal ownership of the asset by making one or more payments;

    - Any lenders rights are limited to that asset and not the SMSF assets – the asset can be charged only in relation to the loan used to acquire it. (this doesn’t prevent the lenders from taking personal guarantees).


    Therefore, a SMSF could borrow to buy a property where a separate trustee holds the property, as legal owner, giving a mortgage over the property, with or without a personal guarantee.
     
    Terry_w, 25th Mar, 2022
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  2. LordofDulac

    LordofDulac Well-Known Member

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    Does personal guarantees affect personal borrowing capacity?
     
    LordofDulac, 24th Dec, 2023
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    General rule is yes but not always
     
    Terry_w, 24th Dec, 2023
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  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Personal Guarantees provided by The Directors of the Trustee are typically excluded by non-smsf lenders, thus they dont affect personal borrow capacity. They ignore the asset, liability and income of the SMSF because in most ( but not all cases) The SMSF borrow capacity is based on the base SGC contribution and income derived from the SMSF in 95 % of the cases where we have SMSF finance for clients.

    If the guarantors are topping up the SMSF over and above the SGC min amount, AND there is explicit borrower disclosure or documented disclosure, for eg Self employed peops, where the trading entity shows excess Super, some lenders will want to know if that extra is needed for the SMSF to not run at a loss, to allow that excess Super to be used as an addback, thus increasing borrow cap.

    That would reduce personal borrow cap per se, but is independent of the acyual guarantee, and only that amount would be removed from the borrowers deemed usual income.

    For example, 12 000 SGC, and the guarantors choose to make an extra contribition of 15 500, AND that additional contribution was used on the SMSF borrow cap, its then reasonable to assume that income isnt available for personal borrowings.

    Ta

    rolf
     
    Last edited: 25th Dec, 2023
    Rolf Latham, 25th Dec, 2023
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