• 1300 331 917

Top 5 Self-Managed Super Funds (SMSF) Borrowing Strategies

Home » Blog » News » Top 5 Self-Managed Super Funds (SMSF) Borrowing Strategies


In 2007 the government changed the laws allowing SMSF trustees to borrow to acquire shares, residential and commercial property. The Cooper Review into superannuation released its preliminary report into all matters dealing with SMSFs in late April 2010 and stated as follows: “the Panel recommends that the 2007 relaxation of the borrowing provisions and the consumer protection measure that the Government has recently announced be reviewed in two years’ time to ensure that borrowing has not become, and does not look like becoming, a significant focus of superannuation funds.”

With more than 20,000 SMSFs now borrowing to acquire property, and the distinct possibility that the SMSF borrowing opportunity will be closed in 2012, we thought it would be great to explain SMSF borrowing, the benefits of SMSF borrowing and provide our best SMSF borrowing strategies.

What does SMSF  Borrowing look like

Surprisingly borrowing through a SMSF is not difficult with all of the major lenders and Chan & Naylor’s in-house loan consultants offering a wide range of products. There is a little bit more documentation to complete but many banks treat the loan as a residential investment property loan, although with the requirement (as specified by the superannuation laws) that the loan is non-recourse.

The Five Benefits of SMSF Borrowing

There are a number of important advantages for a SMSF trustee that successfully carries out a borrowing arrangement to acquire shares, managed funds, residential property or commercial property:

  1. It maximises the wealth effect in the SMSF in times when assets of the fund are rising.  However care should be had in falling markets – although there is the benefit that there are no margin calls due to the non-recourse nature of the loan.
  2. The borrowing can be for a short period or for a period of up to 20+ years (if related party financing is used) allowing it to be structured to the underlying circumstances of the fund members.
  3. Members and related businesses can act as lenders provided that all lending is at arm’s length. This means using equity in another non-super asset or credit line facility to on-lend to a SMSF.
  4. It increases the flow of non-contribution style funds into the SMSF particularly where the members of the fund have used up their contributions capacity. Care must be had to ensure that there is a genuine borrowing and not a contribution arrangement otherwise the Commissioner may deem the borrowing to be a non-concessional contribution.
  5. Future income and capital gains on underlying assets are taxed concessionally in a SMSF and may even be tax free where the assets are held for pension purposes.

Top Five SMSF Borrowing Strategies

Here are some ideas and strategies that your adviser may want to consider:

  1. Transferring shares or property into a SMSF – a member may wish to transfer a parcel of listed shares, managed funds or business real property that they or a related party such as a family trust owns into the fund by way of a borrowing arrangement.  But watch out for CGT – with hindsight this would have been a great strategy at the bottom of the market.
  2. Buying big – borrowing lets the Trustee of a SMSF obtain leverage to acquire those assets that normally would be out of its reach. This may include large parcels of shares or commercial property.
  3. Transferring more assets into a SMSF – the contributions rules limit the dollar amount of contributions that may be contributed to a fund. However if the member wants to transfer a large share portfolio or commercial property they own into their SMSF they can use loans as well as contributions. There are no set LVR requirements for related party loans subject to the arms-length rules.
  4. Acquire Business Property – where a family trust, company or partnership owns a property that the family business operates from, this could be transferred to the SMSF as a mix of contributions and SMSF Loan by a related party. In certain circumstances the owner of the property may be able to use the small business CGT concessions in relation to the business property transfer.
  5. Use SMSF Loans regularly – once the trustee of a SMSF is comfortable using a SMSF Loan arrangement, use it for all members of the fund and continuously to build up a portfolio of properties or shares.

Author Grant Abbott is a Self-Managed Superannuation Fund Adviser, Author & Trainer, and a SMSF Consultant with Chan & Naylor.

Share on TwitterShare on Facebook+1Share on LinkedInDigg ThisSubmit to StumbleUponShare on TumblrSave on DeliciousShare via email

Leave a Comment