# SMSF Borrowing/Gearing - thoughts?



## Ganyeka (23 September 2014)

I did a search and the only thread I found was quite old. 

I've done some homework in terms of the legalities, but I'm more interested in the Forums feeling on the adviseability of this sort of investment strategy for SMSF's and how it might best be safely utilised, which banks are providing lending products that meet all of the requirements etc. 

So, a little background in terms of my understanding of the legislative regime that regulates it - 

Section 67(1) of the Superannuation Industry (Supervision) Act 1993 (the “Act”) contains a general prohibition against a super fund borrowing. For some years, however, many super funds invested in instalment warrants under which they could access all of the benefits of ownership of underlying shares or other securities without the need to pay their full value. This meant that the fund could acquire a warrant using available cash in the fund and pay off the full purchase price over time as cash became available while still receiving all dividends declared and other rights attached.

Both the ATO and APRA concluded that these types of arrangements breached Section 67(1) and also that these instalment warrants were in-house assets under Section 71 of the Act. 

After consulting with the superannuation industry, the Federal Government passed an amendment to the Act which became effective from 24 September 2007 and which authorised certain borrowings by a super fund. Further amendments were passed through Parliament in July 2010 and new Section 67A has been inserted. This section sets out the conditions under which a borrowing by a super fund will be allowed. 

Section 67(4A) allows a super fund to borrow or maintain a borrowing if:
1.	the borrowed money is or has been applied for the acquisition of an “acquirable asset”. An acquirable asset is defined to include any asset that the fund is not prohibited from acquiring under the Act or under any other legislation or regulation i.e. the fund can only borrow to acquire an asset by this method if the fund would be permitted to acquire or is not prohibited from acquiring it directly without borrowing. This widens the prohibition on the assets that may be acquired by extending to assets that the fund might be prevented from acquiring under any other law, for example, the Trustee Acts which exist in all States; 
2.	the asset is held on trust so that the fund acquires a beneficial interest in the acquirable asset; 
3.	the fund trustee has a right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest; and/or
4.	the rights of the lender or any other person against the fund trustee for default on the borrowing, or on the sum of the borrowing and charges relating to the borrowing, are limited to rights relating to the acquirable asset. 

The focus in the Act is on the limited recourse nature of the borrowings. A limited recourse borrowing arrangement (“LRBA”) permits a SMSF to borrow and provided any other assets in the fund are not exposed to the liability incurred by that borrowing.

In addition, the fund may grant security over the acquirable asset in order to secure the LRBA but no other security is permitted over fund assets. 

The Act stipulates that the borrowings must be used to acquire an asset. The forerunner of Section 67A, did not expressly extend to using borrowed funds to develop or maintain the asset but Section 67A now provides that the fund can use borrowed money for:
1.	expenses incurred in the acquisition of the asset (eg stamp duty, conveyancing fees, brokerage and loan establishment costs); 
2.	expenses incurred in maintaining or repairing the acquirable asset. Importantly, borrowed money cannot be used for improvements to the acquirable asset - property development or capital extension would not be permitted using borrowed funds;
3.	refinancing an existing complying borrowing. 


So - What banks or financial institutions are doing this, what if anything are members doing with this ability and what are peoples thoughts on advisability, risk, how it's best utilised etc. Is anyone doing it?

Thanks and sorry for the long post as a new user. Hope I haven't breached any forum etiquette.


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## Junior (23 September 2014)

A LOT of SMSFs are being established to borrow and invest in direct property using a Bare Trust arrangement over the past couple of years.  As the property market has continued to run hot, mortgage brokers and property groups have come to realise that superannuation is a huge pool of money they can tap into using these rules, to earn more commissions and do more deals.

I know of groups which are selling property off the plan in great numbers to investors who are acquiring through SMSFs.

There can be significant tax advantages to be had, but this type of arrangement is not for everyone.  There can be a range of costs involved in establishing and maintaining a leveraged property through super.  You need a super fund with corporate trustee.  You need a 'bare trust' and security trustee company.  Several banks do SMSF loans but they may require the individual to guarantee the loan, so limited recourse is not that limited.  You might then have a large and illiquid asset dominating your super portfolio.

The above represent my random warnings and things to look out for.  If you properly research and run the numbers it could all be worth the effort!


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## Ganyeka (23 September 2014)

The asset being geared doesn't have to be Real Property though. The gearing can be in relation to direct equity in the market.


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## Junior (24 September 2014)

Ganyeka said:


> The asset being geared doesn't have to be Real Property though. The gearing can be in relation to direct equity in the market.




Maybe so, but not sure why you'd want to be >100% in equities using super monies.  Why not achieve this outside of super?  More straightforward and low cost to implement.


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## Ganyeka (24 September 2014)

Super has taken a battering, using some leverage is one way to recover more quickly. And leveraging to get into shares doesn't mean the whole fund is >100% in direct equities.


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## galumay (24 September 2014)

Ganyeka said:


> Super has taken a battering, using some leverage is one way to recover more quickly. And leveraging to get into shares doesn't mean the whole fund is >100% in direct equities.




Using some leverage is one way to lose more, and faster! Just saying.


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## Julia (24 September 2014)

Ganyeka said:


> Super has taken a battering, using some leverage is one way to recover more quickly. And leveraging to get into shares doesn't mean the whole fund is >100% in direct equities.




"Super" is not anything more than a tax advantaged vehicle for investment.  It has not of itself taken any battering.

It's up to the individual to control how the funds held in Super are managed.   No more need to 'take a battering' than in an ex-Super environment.

Re leverage, presumably your Trust Deed would have to be appropriately worded to permit it.
Agree with galumay's reminder that losses also are magnified.


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## Ganyeka (29 September 2014)

When I said Super had taken a battering, I was referring mainly to the managed and institutional funds and SMSF's that don't employ any hedging in a falling market - or treat their Fund too passively, which can be common when people are taking a "longer term view" on investments like Super. And it is far more than a tax advantaged vehicle for investment - that's true to a point, but its an oversimplification. There are a lot of compliance issues and other restrictions. 

In terms of losses being magnified - I wasn't meaning leveraged investment products like CFD's - I meant leveraging an asset like the house to secure or obtain funds to use inside the SMSF as a loan to the fund. That doesn't magnify losses. So maybe forget I said "leveraged" and think "borrowing". 

So I did a little more digging and it seems that Banks will only lend to an SMSF under an LRBA for Property, with greatly restricted LVR's and often only then with third party guarantees. And because a collection of shares in more than one listed company is not permitted you'd need to be in and out of loans for each trade or at the least have a separate loan facility for each company being invested in. Would get expensive and create timing issues as well. 

BUT - Where the SMSF is unable to arrange finance from an institutional lender, or can’t do so on terms that meet the specific requirements of the Trustee, or just doesn't feel like doing it that way, a related party may borrow the required funds and on lend them to the SMSF. So a trustee of the fund could do that ands so could a fund member. Alternatively, a related party having sufficient cash may simply lend to the SMSF. Where a Trustee wishes to use the gearing to acquire shares as opposed to real property, the flexibility offered by having a related party undertake the lending could be more attractive than institutional lending for various reasons. In those cases it is important to have appropriate loan agreements and associated security documents, but it's going to be a hell of a lot easier to do that as the trustee of the fund lending to the fund than going to a Bank every time. 

Who would consider gearing their SMSF in this way? Say draw down some equity in existing real property they own personally and use it inside their fund to acquire shares in this way? Basically use some of the equity in the home to accelerate the growth of their Super?


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