Freedom to invest as you see fit
Why borrow through your SMSF?
Over the last ten years or so, lending to self managed superannuation funds has gone under reform making it easier for you to invest. Many people are choosing to set up SMSF’s for the improved flexibility and greater access to a wide range of investments. Borrowing with your super fund helps you to access new investments and make the most of opportunities when they arise.
One of the main reasons why you may like borrow through your SMSF is for diversification. With a SMSF loan you can make the most of opportunities across the property market and with stocks. If you want to buy an investment property with your super, that is likely to eat up most of the fund’s capital – heavily weighting your portfolio towards one asset. By borrowing you could access capital to buy shares and even out your investment profile.
Borrowing through your SMSF can also be advantageous for tax deductible expenses. The interest payable on any borrowings are offset against the SMSF’s taxable income.
What are the risks?
As part of the legal requirements to borrow with a SMSF – all loans must be what are called ‘Limited Recourse Borrowing’. This involves a separate trust structure that is linked backed to your SMSF trustee. There are restrictions on the type of assets you can buy with this type of lending as the lender has rights over the assets but cannot make a claim over your other assets held by the parent trustee entity.
This means that lenders are more likely to offer loans to SMSF’s on things like property, where they are confident the value of the property will remain stable or grow over time. Lenders will also be comfortable allowing SMSF’s to buy high quality stocks on margin.
The whole purpose of limited recourse borrowing is to protect the financial future of the borrower (their accumulated assets in their super fund) by limiting the lender’s claim should things turn for the worst. Essentially this means that the risks are low for the borrower, and low for the lender – as they will prefer high quality assets.
Did You Know?
Business owners who also own the premises of the business often decide to restructure and include the property in their SMSF for tax advantages. If you don’t own the premises, you may want to consider borrowing through your SMSF to purchase it. Ask us to find out more.
Leveraged investments can multiply returns substantially. If you bought an investment property which used up most of your SMSF cash, but borrowed to also invest in a good share market opportunity – a 10% gain on the stocks you purchased could actually give you a 50% return on the equity you have.