When and how to use Super Burrowing
MY FICTITIOUS client, Victor Lawless, has decided he wants to buy his own industrial shed from which to run his small business. Vic has been talking to his mates at the pub and they have 'advised' that he should do a 'super borrowing' to buy the shed.
Super borrowing can be a great option for investment, particularly for business owners to acquire a premises in the right circumstances, but there are some restrictive rules. Here's a lesson on the basics:
Self-managed superannuation funds (SMSF) can borrow money to acquire an asset, through what is called a 'Limited Recourse Borrowing Arrangement'' (super borrowing);
As Vic's super is held with an industry fund, to do a super borrowing, he would need to set up a SMSF and roll over (transfer) some or all of his superannuation balance to the SMSF;
Before setting up a SMSF, Vic would need to obtain financial advice - essential! SMSFs are not viable for everyone.
SMSF borrowing is not a way of accessing superannuation entitlements early. They are still locked up as "superannuation" until Vic satisfies a 'condition of release' e.g. reaching retirement age. Only certain types of assets can be acquired through a SMSF borrowing. The most popular I deal with in practice for clients are commercial and residential properties (which will be used entirely for investment purposes, not personal), although I have also done some share acquisitions;
The acquisition must meet the 'sole purpose test'- i.e. it must be for the sole purpose of providing benefits to the members of the Fund on retirement. It cannot be for some other motive, such as helping a relative.
To do a SMSF borrowing, a bare trust needs to be set up before signing a contract. It is the bare trust that needs to enter into the contract - not the SMSF. Many make the mistake of signing a contract under the SMSF name (or even personal names) before the bare trust is set up - this can cause all sorts of issues, including a breach of the rules, inability to obtain finance and potentially double stamp duty;
All parties' rights (e.g. the bank) against the SMSF must be limited to the asset only. For example, if there is a default and the property drops in value and is not worth enough to pay out the loan - too bad - the bank cannot go after the SMSF's other assets.
From experience, the banks will typically only lend about 60-70% of the purchase price for commercial properties - Vic would need to have enough super to fund the shortfall plus costs and stamp duty.
Suzanne Brown is a principal of McKays Solicitors and Mackay's only Business Law Accredited Specialist.