Under section 67 of the Superannuation Industry (Supervision) Act [SIS Act] there is a general prohibition on SMSF borrowing to fund its investments. However, there are exceptions under Section 67A and 67B of the SIS Act subject to the following conditions being meet;
- The setting up of a bare or custodian trust. The trustee of this bare trust holds the legal title to the acquired property as custodian for the trustee of the SMSF for the duration of the loan arrangement, and
- Either a third party (usually a bank) or a related party lender advancing funds to the SMSF for the purpose of acquiring the business real estate.
- In the event of a default under this arrangement the lender only has recourse against the business real estate being purchased and not any other assets of the SMSF. The major feature of this lending arrangement is that the lender has limited recourse. This is important because it protects the other assets of the SMSF in respect of this lending arrangement.
The Australian Taxation Office has released interpretive decisions ATO ID 2014/39 and 2014/40. These interpretive decisions outline the opinion of the ATO with respect to the various terms and conditions of such a limited recourse lending arrangement.
The decisions also encourage proper documentation to be kept. Such documentation should evidence the arrangement as being on an arm’s length dealing.
You should seek expert advice before embarking in a borrowing transaction through your SMSF.
Lou Polito and Lawrie Picone each have over 35 years’ experience and can assist you in these types of transactions. Please call us on 9525 8100 for an obligation free discussion.