Date of article: 14 March 2008
Last updated: 26 September 2008

SMSF borrowing rules examined

Up until 24 September 2007, superannuation funds were not permitted to borrow to invest. The borrowing prohibition is one of a number of rules put in place to limit the risk in superannuation fund investment.

From 24 September 2007, the new sub-section 67(4A) of the Superannuation Industry (Supervision) Act (SISA) will allow a self managed superfund (SMSF) to borrow, but any borrowing must be in accordance with an arrangement that has the following features:

• the borrowing is used to acquire an asset that is held on trust so that the superannuation fund trustee receives a beneficial interest and a right (but not an obligation) to acquire the legal ownership of the assets through the payment of instalments,
• the lender’s recourse against the superannuation fund trustee in the event of default on the borrowing and related fees, or the exercise of rights by the fund trustee, is limited to rights relating to the asset, and
• the asset must be one that the superannuation fund trustee is permitted to acquire and hold directly (i.e. for example, a SMSF cannot acquire residential property from a member, but permitted to their acquired commercial property as would residential property from a non-related party).

Also noteworthy is that sub-sections 71(8) and (9) of the SISA exclude an investment in a related trust forming part of the borrowing arrangement which meets the requirements of sub-section 67(4A) as in-house asset unless the underlying asset would itself be in-house asset of the fund if it was held directly.

Although the new sub-section allows superannuation fund to borrow, the borrowing must satisfy the conditions of the new-section. The general prohibition on borrowing remains in force.

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Useful resources

The Australian Taxation Office has issued their view on instalment warrant type arrangement.

ATO Alert - TA 2008/5 (external link)

Instalment warrants and super funds - ATO questions and answers (external link)

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