SMSF basics: Can my DIY super fund borrow money?

Trish Power — Fri, 29 Oct 2010 19:54:55 +0000

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.

SMSFs: Purchasing options is OK, and even sometimes CFDs

Trish Power — Fri, 23 Oct 2009 10:10:00 +0000

Q: Can a SMSF buy/sell call/put options? I understand that CFDs are not permitted because it breaches the charge over asset regulation. However, is that true that options are derivatives and in giving shares as a collateral (when writing options) to the Options Clearing House, it will treated differently (an exemption) as long as the SMSF has a derivatives risk management statement?

Trish’s response: Before I answer your question about options, I need to clarify your comments about contracts for difference (CFD). In certain circumstances, the Australian Tax Office has indicated that CFDs are allowable investments for self-managed super funds (SMSFs), provided that cash is used as collateral for any margin payments on the contract, rather than using fund assets as collateral. Now, in my view, cash is a fund asset, and I’m surprised that the ATO has taken this view on CFDs but there you have it, although I would be closely following the ATO’s views if any SMSF trustee is considering using CFDs within his or her fund. (If you want to read more about the ATO’s view on SMSFs and CFDs, check out the ATO website).

In response to your question on options: Derivatives, such as options, are allowable investments for a SMSF, subject to certain conditions, including:

ensuring that the fund’s investment strategy (and trust deed) permits the SMSF to purchase options and
the fund has a derivative risk statement, that is a statement that explains the SMSF’s risk management policies when using derivatives.

For the most part, options are used as a hedging tool to minimise the volatility in an investment portfolio, although some investors use options as a pure trading tool for profit. Any SMSF trustee considering using options within a SMSF portfolio needs to confirm the use of such instruments with the ATO and/or with the fund’s adviser.