SMSF basics: Can my DIY super fund borrow money?

The general rule is that your super fund can’t borrow money, although like all rules the ‘no borrowing’ rule has some exceptions. SMSF trustees need to understand the difference between direct borrowing and indirect borrowing and the special rules that apply to each exception.

Borrowing directly in two scenarios only

Your fund can’t directly borrow money, except in two instances: if you need cash to pay a member’s benefit, or if you need cash urgently to settle a share transaction.

1. Borrow to pay a super benefit

A SMSF can borrow money to pay a benefit to a fund member if the loan satisfies the following conditions:

  • SMSF member’s benefit payment is required by law, or by the fund’s trust deed
  • SMSF trustee can’t pay the benefit unless the fund can borrow money
  • Loan is for no more than 90 days
  • Total loan is for no more than 10% of the value of the SMSF’s assets.

2. Settle a share transaction

A SMSF can also borrow money directly for up to 7 days to settle a share transaction. A super fund trustee can only borrow money to settle a share purchase if:

  • At the time the investment was made, it was likely that the borrowing would not be needed.
  • The period of the loan is no more than 7 days.
  • The total amount borrowed can’t exceed 10% of the fund’s assets.

Note: The super laws also permit the tax commissioner to make written determinations exempting certain share purchase borrowings.

Borrowing indirectly is the latest trend

Your super fund can also indirectly borrow money. A SMSF can invest in managed funds that borrow money (geared managed funds), or even invest in instalment warrants, warrants, options or contracts for differences (CFDs). I write about options and CFDs in the article SMSFs: Purchasing options is OK, and even sometimes CFDs.

The latest ‘hot’ trend in the SMSF world is the opportunity for a SMSF to indirectly borrow to purchase fund assets using a limited recourse borrowing arrangement.

In plain English, such an arrangement enables your fund to purchase an asset using borrowed funds. Your fund makes an initial payment, your fund then pays interest and after a period of time, the fund has the option to eventually repay the full amount and received full ownership of the asset. The super fund secures beneficial ownership of the asset from the very start.

You can read more about limited recourse borrowing arrangements in other articles on the SuperGuide website.

For more detailed information on the general borrowing rules, you can refer to the ATO SMSF ruling, SMSFR 2009/2,  which provides guidance on the borrowing ban and the exceptions that apply using case studies. Click here to access the ruling.

© Copyright Trish Power 2009-2014
Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.

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Comments

  1. re. Borrowing to pay a pension

    Can the loan (with a loan agreement in place with a related party/member) to pay the pension, the pension payment, and the subsequent repayment of the loan, for example by non-concessional contribution on July 1st, the following year, all be implemented via book entries rather than cash following through the funds bank accounts?

    Cheers,
    Graeme

  2. Graeme says:

    Trish,

    When a trustee borrows to pay a super benefit, is the interest expense an allowable deduction?

    Can the loan be from a related party, e.g., the trustee/member?

    Can the loan (with a loan agreement), and subsequent repayment (via non-concessional contribution) be by book entries rather than cash through the bank accounts of the fund?

  3. Hi i have a smsf . I personal own industrial property which I want to sell to my smsf. I wish to be the lender of the funds to the smsf . My smsf also owns other industrial property which is unencumbered
    and has $120000 in cash .

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