A Golden Age for SMSF Investing

The self managed superannuation fund (‘SMSF’) can be an exceptional investment vehicle. Ordinarily superannuation funds are prohibited from borrowing. Due to recent changes in Australian superannuation legislation the range of investment choices for your SMSF has exploded to include a whole range of limited recourse borrowings, including property instalment warrants.

A property instalment warrant is an agreement that enables you to purchase a property over time. Under such an agreement, you make an initial part-payment and then pay the remaining instalments plus interest and the cost of setting up the loan to fund the property. When you have paid all the instalments under the warrant, the property is transferred.

At any time, you can default and forfeit the property you are purchasing under the agreement, and any payments you have already made. Unlike a traditional mortgage, where a lender can repossess and sell your property and still demand repayment of any remaining amounts over and above that, a limited recourse loan limits the lender’s recovery to the property alone.

There are potentially big tax advantages to investing in property through a super fund compared to a straight property investment in a person’s own name outside of super. Capital gains can be minimised and even eliminated if the property is held until the pension phase (age 60). Tax on the rental income is 15 per cent maximum and you might effectively receive a tax deduction (via salary sacrifice) for principal loan repayments.

These changes in Australian superannuation legislation are good news for SMSF investors as it provides certainty as to the eligibility of gearing via instalments within the SMSF. Thereby making it possible for a SMSF to pursue a geared investment strategy.

It will allow a SMSF Trustee to borrow money provided:

The changes to the legislation will also allow SMSF’s to explore some other exciting transactions such as instalments on shares to obtain the tax benefits of franking tax credits

This information has been prepared in good faith, is in the nature of general comment only, and neither purports, nor is intended, to be advice on any particular matter.  You should not act or rely upon any matter or information contained in or implied without taking appropriate professional advice which relates specifically to your particular circumstances.  The authors and consultants expressly disclaim all and any liability to any person (whether a reader or not) who acts or fails to act as a consequence of reliance upon the whole or any part of this information.