How does the strategy work?

Superannuation fund trustees are able to borrow monies in order to purchase an investment asset provided the borrowing meets certain strict conditions. Where an SMSF borrows under these rules, it will need to ensure that the borrowing meets the requirements outlined under superannuation law. Broadly, in order for a borrowing to meet the superannuation requirements, the following must apply:

• The SMSF trustee(s) enters into a loan arrangement and must use the borrowed funds to purchase an asset.
• The asset must be held by a custodian on trust for the SMSF. Under this arrangement, the SMSF will hold the beneficial ownership of the asset.
• The SMSF must have a right (but not an obligation) to acquire the legal title to the asset from the custodian by making one or more instalment payments.
• The lenders’ rights against the SMSF must be limited to the rights relating to the underlying asset.

The following diagram illustrates a basic borrowing arrangement, where monies are borrowed from a lender (a bank or a related party) and are used to acquire an asset in the name of a security trustee under a bare trust arrangement where the fund beneficially owns the asset.

Find out if SMSF borrowing is right for you and talk to a specialist. Call us today on (08) 9423 0300 or complete the contact form to arrange an appointment.