Under new legislation introduced on 7 July 2010 (Superannuation Industry (Supervision) Act 1993 as amended), a self-managed superannuation fund (SMSF) is expressly allowed to refinance a borrowing arrangement.
There is now the ability to refinance existing loans, allowing for a fund with cashflow problems to minimise risk of default.
Associated expenses can be included as part of borrowing, for example, stamp duty, conveyancing, brokerage and loan establishment costs. (As the regulator with responsibility for SMSFs, the ATO has issued guidelines as an Explanatory Memorandum).
Changes will apply to all borrowing arrangements (including those entered into before the changes were enacted); so borrowings entered into under present law can restructure to the new rules. The asset must be held on trust.
Some of the other changes are noted below.
Only a single asset may be acquired
The changes limit borrowing arrangements to be used only to acquire a single asset or to acquire a collection of identical assets that have the same market value as each other together which are treated as a single asset (such as a collection of ordinary shares in the same publicly listed company). A collection of shares in different companies would not be permissible.
So, an SMSF is allowed to borrow to acquire, for example, 15,000 BHP shares, but not allowed to borrow to acquire 5,000 BHP shares and 10,000 Rio Tinto shares on the same borrowing. To do the latter, two borrowing arrangements are required.
Similarly, if SMSF trustees want to borrow to acquire two identical apartments in the same building, two separate borrowings are required, and if each apartment has separate titles for each car park, additional separate borrowings are required for each title.
Borrowing to fund property development not allowed
Under the new law, SMSF trustees are not permitted to borrow for improvements to real property, but are allowed to borrow to maintain or repair the asset.
Replacement asset very limited
The new legislation states what assets can be replaced, and under what circumstances. Broadly speaking, a ‘replacement asset’ may be a share in the same company as the original share and must be worth the same amount as the original share. You are not allowed, for example to sell BHP shares and buy CBA shares (as part of a change to the investment strategy). A replacement asset may also be a unit in the same unit trust.
There is some scope for the replacement asset rule to apply where the replacement occurs as a result of a takeover, merger, restructure or demerger of the original company or unit trust.
There is no scope for the replacement asset rule to apply to real estate.
Personal Guarantees
The use of personal guarantees is allowed, however the rights of the lender and any other person against the SMSF trustee are limited to the acquirable asset.
Don’t get it wrong
Remember that if the trustee gets it wrong, it will risk the complying status of the fund. Always seek professional advice from a superannuation specialist before entering into any borrowing arrangement. Give Andrew Frith, a superannuation expert of The Self-Managed Super Specialists, a call for the most appropriate advice for your circumstances.
Disclaimer
The information contained is based on information believed to be accurate and reliable at the time of publication. Any illustrations of past performance do not imply similar performance in the future.
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This information is of a general nature only. It is not intended as personal advice or as investment recommendation, and does not take into account the particular investment objectives, financial situation and needs of a particular investor. Before making an investment decision you should read the product disclosure statement of any financial product referred to in this newsletter and speak with your financial planner to assess whether the advice is appropriate to your particular investment objectives. financial situation and needs.
Leenane Templeton The Self-Managed Super Specialists Pty Ltd is a Corporate Authorised Representative of Lonsdale Financial Group Limited. Level 41, 120 Collins Street, Melbourne VIC 3000. Australian Financial Services Licensee, Licence Number 246934, ABN 76 006 637 225. Andrew Frith is a sub-authorised representative.