Lending to your SMSF, Andrew Yee
Self Managed Super Funds (“SMSF”) have been allowed to borrow since September 2007 provided the borrowing satisfies certain conditions, the main being:
the loan must be used for the purchase of a single acquirable asset;
the asset must be held in a bare trust or holding trust; and
the loan must be limited recourse in nature meaning the rights of the lender are limited to the geared asset and no other asset of the SMSF.
These conditions are in addition to the basic rules of SMSF investing being that the geared investment needs to provide for the member’s retirement and also be authorised by the fund’s trust feed and the fund’s investment strategy.
The SMSF borrowing rules also permit borrowing from a related party such as a fund member, provided the terms and conditions of the loan are made on an arms length basis.
However recent view expressed by the Australian Taxation Office (“ATO”) has the potential to become a ‘game changer’ in respect of lending to a SMSF by a related party. In short, the ATO were of the view that:
A related party could lend to their SMSF at an interest rate that was below the market rate of interest and perhaps as low as nil.
The amount of discount provided by the related party to the SMSF is not treated as a contribution to the SMSF by the related party.
These comments by the ATO will no doubt attract the interest of persons who have personal funds available to gear up or even “turbo charge” their SMSF by providing a low interest or no interest loan to their SMSF.
Furthermore, such loans are not treated as contributions and therefore are not restricted by contribution caps. The other major benefit of lending to your super fund is that these monies are invested in a low tax environment because a SMSF only pays a maximum tax rate of 15% on its income (including capital gains) or 0% if the fund is paying a pension. Also there is scope for related party to forgive loan repayments of the SMSF and have the forgiven loan repayments treated as contributions to the SMSF.
Anyone considering embarking on a low interest or no interest SMSF lending strategy should seek professional advice in terms of structuring the arrangement or even request a private ruling from the ATO. Although the comments made by the ATO were made in a public domain, they do not carry the force of law nor are they binding on the ATO. Also care must be taken to ensure that the terms and conditions of the loan are made at arms length with a formal loan agreement in place. If the loan is to be provided by a trust or company of the related party then Division 7A of the Income Tax Act needs to be complied with otherwise the loan could be treated as a ‘deemed’ dividend to the SMSF.