9th April 2008

Dear Investor,

New borrowing rules for SMSFs

Self-Managed Superannuation Funds ("SMSFs") continue to grow at a rapid rate, with Australian Taxation Office statistics showing that there were close to 373,000 as at December 2007, servicing nearly 719,000 members. Asset balances held in SMSFs at the end of last year topped $300 billion.

The Federal Government recently amended the superannuation laws to allow SMSF trustees to borrow, in very limited circumstances, in order to purchase investment assets. The move does not reverse the overall prohibition on superannuation funds borrowing - it simply provides a specific exception in certain circumstances.

The amendment, which became effective in September 2007, means that borrowing possibilities are wide. For an SMSF with a good asset base, the opportunities for leverage are significantly increased. Superannuation funds can now borrow to buy property, and investors have as much choice and control over investment properties inside their SMSF as outside.

New borrowing rules

The superannuation laws have been amended to allow the trustee of a SMSF to borrow in the following circumstances:

  1. The asset (e.g. real estate), must be one that the SMSF is permitted by its trust deed and by its investment strategy to acquire.
  2. The borrowing is in the name of the SMSF trustee, but the borrowing is non-recourse to other assets of the SMSF. In other words, the rights of the lender are limited to the asset that is the subject of the borrowing.
  3. The legal title of the asset must be held in trust by a trustee independent of the SMSF trustee (and preferably independent of the members of the SMSF), on behalf of the SMSF. The trustee of the SMSF makes payments into the trust to obtain beneficial ownership and full legal ownership once the asset is fully paid for. Any income that accrues such as dividends, rent or interest does so for the benefit of the SMSF.
  4. The lender can be an individual or a commercial lender. The loan is secured by way of a mortgage over the asset. It may also be possible for the lender to obtain a guarantee from the members of the SMSF and possibly mortgages over other real estate owned by the guarantors outside the SMSF.
  5. At the end of the loan period, the loan is discharged and full legal title may be transferred to the trustee of the SMSF.

Advantages of SMSF borrowing

Leverage: The new rules have the potential to increase the wealth effect in the SMSF in times when assets of the fund are rising.

Flexibility: The SMSF may have access to assets that would otherwise be unavailable without borrowing.

Lending: Members and related businesses can act as lenders provided that all lending is at arm's length.

Funding: Member lending increases the flow of non-contributions funds into the SMSF which fall outside the excess contributions tax rules.

SMSF borrowing strategies

New rules have created some interesting strategic opportunities for SMSFs:

  1. Purchasing large assets - borrowing enables the trustee of an SMSF to obtain leverage to acquire assets that normally would be outside of their financial capacity. New options place such purchases as commercial property within the reach of many SMSFs.
  2. Member financing - by taking advantage of the new borrowing rules a member may now be able to transfer securities or real property that they own into the SMSF, subject to the "in-house" asset rule. In this scenario, the member acts in the capacity of the lender. Any repayments made by the SMSF to acquire those assets may then be used as a contribution back into the SMSF by the member (subject to the contribution rules).
  3. Increasing asset contributions - the contributions rules cap the dollar amount of contributions that may be contributed to a fund. Since investment in the SMSF borrowing arrangement is generally measured in terms of net assets, the effect of a member contributing assets is to enable more to be achieved with SMSF borrowing.

If you are planning to use a borrow and invest strategy for your SMSF, take extreme care as the Australian Taxation Office has signaled its intention to crack-down on any breaches.

How can La Trobe help?

The Select Mortgages Option, one of the investment options in the La Trobe Australian Mortgage Fund, provides the opportunity for investors and borrowers to be brought together in loans, secured by first mortgage over real property in Australia.

This new borrowing opportunity for SMSFs provides scope for an SMSF which is in the asset accumulation stage (i.e. wants to borrow) to be brought together with SMSFs which are in the income generation stage (i.e. want to invest), in a mutually convenient and profitable arrangement.

If your SMSF fits into either of these situations, see your professional adviser.

A word of caution

Whilst these rules increase investment flexibility for SMSFs, there are still a number of issues regarding these rules which require clarification. You should seek professional advice before embarking on a borrowing strategy for your SMSF.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

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