Legislation was passed in 2007 to permit Self-Managed Super Funds (SMSFs) to borrow funds to make investments for the retirement of their member(s). There were different types of investments that were allowed to be made, a few of which are investments in management funds, shares, and real estate.
When borrowing in Self-Managed Super Funds, there are many important rules that have to be complied with. For example, among these rules include the establishment of a “bare” trustee. Banks need written statements and personal guarantees by member(s) of the fund. Even then, banks are only allowed to offer certain types of loans to SMSF Trustees.
When you start borrowing of this nature in your SMSF, you must be aware that because of the complexities involved, it is usually a lengthy procedure. Everything needs to be well planned and coordinated in these situations. A solicitor will need to prepare the necessary documentations. In the case of direct property, a solicitor should also assist in the purchasing of the property.
Remember that for property investment, the banks may require a substantial deposit of around 40-50 percent of the total sum of the investment. In addition, they will also require personal guarantees from member(s) of the fund. Hence, it is advisable to that careful consideration be given for those whom are contemplating such arrangement.
Member(s) age should also be taken into consideration when developing a borrowing arrangement. For example, members over the age of 45 should exercise caution as there could be equity difficulties if the asset is not paid off before the member’s pension begins. On the contrary, members who are around 40 years of age have less to worry about and may find this a good strategic opportunity to obtain assets and have them paid off before beginning their pension. New real estate also provides the opportunity for both capital allowance and depreciation which may assist in the tax effectiveness of the investment within the SMSF.