# SMSFs allowed to borrow? Impact on property prices?



## CompareSMSF (27 September 2007)

Wondering how many SMSF members (and property investors) have come across this article recently in the Bulletin, and what is your reaction?

DIY funds await green light

Up until now there has been limited opportunity for DIY Super funds to borrow.  

The $240 Billion of assets accumulated as at 30 June 2007 has largely been done without any leverage, and as a result the average SMSF investment portfolio has limited exposure to direct property (up until now).

Assuming the legislation is (has been?) passed it is interesting to consider the potential impact on property prices?


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## Julia (27 September 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*

Thanks for that link.  Interesting.
I'll wait to find out about the lending criteria.  
I'm a bit surprised that this will be allowed given the apparently quite high level of unsophisticated investors setting up SMSF's.


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## So_Cynical (27 September 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*



Julia said:


> I'm a bit surprised that this will be allowed given the apparently quite high level of unsophisticated investors setting up SMSF's.



Why surprised...isnt most the the financial advise industry based on people who know what 
there doin taking money from people who don't.


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## Whiskers (27 September 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*



So_Cynical said:


> Why surprised...isnt most the the financial advise industry based on people who know what
> there doin taking money from people who don't.




That is .... So Cynical! 

But True!


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## Whiskers (28 September 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*

This is the ATO version I just got in my SMSF newsletter. Although the ATO points out it is still before the senate, they seem to me to be pretty sure it will pass. Note the last sentence, "...when the bill becomes law". Apparently the Committe on Economics reccommended it be passed.



> SMSF newsletter - Edition 2
> 
> Investing in instalment warrants
> There have been a number of announcements about superannuation funds investing in instalment warrants. Instalment warrants are investment products that, traditionally, provide an investor with the right, but not the obligation, to buy an underlying asset through the payment of instalments. Such arrangements involve a limited recourse borrowing by the superannuation fund (that is, the fund’s other assets cannot be used to repay the loan).
> ...



http://www.ato.gov.au/super/content.asp?doc=/content/00107444.htm&page=6&H6


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## Julia (28 September 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*

The instalment warrant facility isn't new.  The ATO must be a bit slow with its newsletters.  I might be missing something here, but their ruling doesn't appear to include permission to gear into property from within a SMSF
so I don't really see what has changed.
I can recall getting a bank produced booklet about self funding instalment warrants more than a year ago.


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## Whiskers (29 September 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*



Julia said:


> The instalment warrant facility isn't new.  The ATO must be a bit slow with its newsletters.  I might be missing something here, but their ruling doesn't appear to include permission to gear into property from within a SMSF
> so I don't really see what has changed.
> I can recall getting a bank produced booklet about self funding instalment warrants more than a year ago.




Hi Julia, I'm still setting mine up, but I heard there was a problem and the ATO was taking action against some, so I'm keen to get a good understanding of this. I have found this official "EXPLANATORY MEMORANDUM" of the new laws where chapter 3 seems to spell out the old problem and new remedy. 



> *Chapter 3*
> *Investment in instalment warrants by
> superannuation funds*
> 
> ...




A detailed explanation and example are provided at; http://parlinfoweb.aph.gov.au/piweb/Repository/Legis/ems/Linked/21060712.pdf


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## resourcesman (29 September 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*

I vaguely recall some ATO ruling whereby you can invest super assets into CFDs, so you have almost the same effective exposure as having a margin loan. Doesn't work for property investments though, because there is no equivalent to CFDs.

Didn't pay much attention to it, so I probably misunderstood it or something


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## Julia (29 September 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*

Hi Whiskers,

Thanks for quoting the actual rulings.  How I hate legalspeak!
That appears to confirm that it's simply about instalment warrants so I can't see where there's any suggestion of SF's being permitted to borrow to buy property, get margin loans etc.as suggested in compareSMSF's original post.


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## CompareSMSF (13 December 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*

** Bump **

Scale new heights with rule change

Just the start of an avalanche of new (manistream) products to hit the market for SMSFs targeted at gearing into property.


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## DaleGG (13 December 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*

Hi

The ability of a SMSF to borrow money to buy property will be through instalment warrants, I understand.  So, it will be a little different than normal property transaction.

I think that you will find that we will all be bombarded with information (marketing) in the coming months.

Have fun

Dale


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## tech/a (31 December 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*

Yes its official and has been available since 30th Sept.

The deposit is set-up as an internal Instalment warrant within the Fund. The loan is then made with the SM Super Fund.

Here are some *Tremendous Benefits*.
(1) 10% Capital Gains Tax if held for 12 mths or more.
(2) Maximum of 15% tax on Rental income.

*Affordability*
Loan can be funded from Tennant rental,Employer Contributions,Salary Sacrifice,and personal Contributions and any Government contributions applicable.
Effectively your PERSONAL borrowing capacity wont be affected as the SMSF is a separate entity.Great news for those of us investing in other areas and with regard to business loans etc.

There are rules and a normal housing loan will not apply.
So a good relationship with a savvy Mortgage Broker and an experienced SMSF Accountant are a must.

*This is tremendous news *for those of us actively involved in property and music to the ears of those who could now be in the position to take advantage of their previously un touchable Super hoard!


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## professor_frink (31 December 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*



tech/a said:


> Yes its official and has been available since 30th Sept.
> 
> The deposit is set-up as an internal Instalment warrant within the Fund. The loan is then made with the SM Super Fund.
> 
> ...




Tech, do you have a link to some more information on this. Must say that it seems like there could be a bit of potential in it


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## tech/a (31 December 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*

Got it from an article in "The Australian Property Investor" December issue.(Page 20)
Written by Pat Mannix a CPA with Guntherum-Goss& Associates in Victoria.
I had a look on their website www.guntherumgoss.com but couldn't find anything there directly related to it.

I'm sure there is and will be a few doing a BIG KEV on this,really exciting.
The implication for individuals as well as the "Floundering"
Housing market over the next 3 or so years and beyond is tremendous.

It could have the same impact on housing as Compulsory Super had on the stock market.There will be those taking advantage of the rental squeeze Australia wide,holding for longer periods and benefiting massively in the long-term.

All of a sudden Joe average who has a reasonable super fund of OVER $120,000 can turn to a SMSF set-up and  become involved in the best vehicle available for long-term wealth creation.


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## professor_frink (31 December 2007)

*Re: SMSF's allowed to borrow? Impact on property prices??*

cheers tech. 

Will go and see if I can find some info on it


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## Tom Ronalds (15 February 2008)

*Re: SMSF's allowed to borrow? Impact on property prices??*

There are several "strategies" currently being spruiked by the usual suspects. Here's a sample:

 "If you want real estate but don't have enough money in your super to buy it, you can now use an instalment warrant.

"Over time, you buy the investment outright with salary sacrifice and the super guarantee contributions."

The analysis I have seen on this is "be very wary!" Apparently this was a decision made by a junior minister in the previous government and was very much opposed by the relevant bureaucrats.

The Assistant Commissioner for Superannuation of the ATO, Ian Read, has said the following:

"The use of instalment warrants by a SMSF in a way that constitutes a breach of the superannuation laws is on our radar for 2007-2008."

Tom R


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## xoa (15 February 2008)

*Re: SMSF's allowed to borrow? Impact on property prices??*

If greedy superannuants want to borrow money to gamble on the property bubble, let them. They've already lost billions of dollars on the stock market this year, why should they stop there?

It won't affect property prices in the long term.


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## Happy (15 February 2008)

*Re: SMSF's allowed to borrow? Impact on property prices??*



xoa said:


> It won't affect property prices in the long term.




I think it will affect price by preventing it from plummeting.


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## xoa (15 February 2008)

*Re: SMSF's allowed to borrow? Impact on property prices??*



Happy said:


> I think it will affect price by preventing it from plummeting.




You think that blowing more borrowed money into the bubble will stop it from bursting? 

I think than an infusion of more debt would have exactly the opposite affect.


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## Happy (15 February 2008)

*Re: SMSF's allowed to borrow? Impact on property prices??*

Surely, if catastrophic downward pressure prevails, no amount of money is going to hold prices up, but when super money can absorb perceived glut, at least in short to medium term we are out of the woods.


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## CompareSMSF (19 February 2008)

*Re: SMSF's allowed to borrow? Impact on property prices??*

A useful balanced perspective from Trish Power Link


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## tech/a (19 February 2008)

*Re: SMSF's allowed to borrow? Impact on property prices??*



> Alternatively, if your fund does not have enough cash, you can also use personal debt to purchase a property that your super fund co-owns.




From the link above.
This is the most exciting opportunity that I see.
Releasing the equity which is locked away.
Still looking into it---but hoping that asset rich SMSF can be used in a co ownership transaction---effectively


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## ROE (19 February 2008)

*Re: SMSF's allowed to borrow? Impact on property prices??*

I think its crazy idea .. Super suppose to be manage in a sensible way so if all failed in your life you have something to hang on to in your retirement.

Having this sort of rules encourage people from all walk of life to have a go on their own and manage their super and think they can get a property or two and be rich like many property investors.

The reality is not many people under the risks, the work involve in investing and many people end up losing money.

Not to mention the dodge brothers of financial management will no doubt take advantage of this and come up with all sort of instruments to steal people nest eggs.

my 2 cents


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## Jimminy (24 March 2008)

*Re: SMSF's allowed to borrow? Impact on property prices??*

borrowing 50% via installment warrant with Westpac it looks like to fund a property purchase (commercial), the rate will be 11.32% including margins....

Anyone know what the going rate is?? Does this sounds around the mark?

Westpac seem to be very ill-informed about these...


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## CAFA1234 (25 April 2008)

*Re: SMSF's allowed to borrow? Impact on property prices??*



			
				Happy; said:
			
		

> Surely, if catastrophic downward pressure prevails, no amount of money is going to hold prices up, but when super money can absorb perceived glut, at least in short to medium term we are out of the woods.




Has anyone seen any good offers for tis sort of lending. the few I've seen are commercial property only and then only 50% loan Maximum, and then a higher interest rate and all sorts of fees.

There must be an opportunity to use existing equity in one's primary house to back the loan?

I guess the risk for the lender is that of income stream. If we assume a 10 year minimum then the risk to capital is probably very small, if only due to inflation. So if the income stream is solid then why not loan at standard rates. e.g. Defense housing where the government backs the income stream for 10/12 years. Or am I missing something??

Please feel free to put my head back on straight if I'm talking gibberish.


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