In brief - You can make extra contributions to your super fund by borrowing from the bank or yourself
Self managed superannuation funds have been able to borrow for investment purposes for a number of years. Increasing numbers of SMSFs are taking the opportunity to borrow to buy real property, although the ability to borrow applies equally to the purchase of other assets such as shares.
With lower contribution limits you can still in effect make additional contributions to your super fund by borrowing from the bank or from yourself.
Asset needs to be held in a separate trust for super fund if money borrowed
With legislation confirming a clear ability to borrow, the banks have offered a range of products for SMSFs that comply with the relevant legislation.
This legislation principally requires that any loans are non recourse to the general assets of the SMSF and are strictly limited to recourse against the actual asset purchased.
There are clearly some additional structuring costs, as the asset needs to be purchased in the name of a bare trustee who holds the asset on trust for the superannuation fund and agrees to transfer the legal ownership of the asset to the superannuation fund when the borrowed monies have been repaid in full.
Obviously loans from banks and other financial institutions will be at commercial rates and with these borrowers the rate will clearly not be above or below a commercial arm's length rate.
Loans from an associated entity of members of the SMSF
If a loan is made by an associated entity of the members of the SMSF instead of a third party financial institution, more care needs to be taken.
The Australian Taxation Office (ATO) takes the view that paying interest in excess of a normal commercial rate is equivalent to withdrawing money from the fund. This is not allowed and therefore care should be taken not to pay a rate that exceeds a normal commercial rate.
Somewhat surprisingly, the ATO's current view is that it has no concerns with loans that are at a lower than commercial rate.
You can legally make an interest free loan to your SMSF
Accordingly, where a member of a SMSF wishes to increase the level of assets held in the fund but has reached the threshold of their ability to contribute to the fund, they can achieve a similar result by making interest free loans to the fund.
By way of example, a member of a fund will currently be limited to a contribution of $25,000 a year (deductible) and $150,000 a year undeducted, with a capacity to bring forward three years at a time. This gives a member the ability to make a total contribution of $475,000 in any one year.
If a member wishes to purchase, say, a $5 million commercial property for the SMSF, the member could in fact choose to borrow 100% of the acquisition cost with an interest free or minimal interest loan from a related entity of the member.
The net result will be that rather than the member paying tax at the member's marginal tax rate, the tax will be 15% on income and 10% on capital gains whilst the fund is in accumulation phase and no tax at all will be payable in the pension phase.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2023.