Strategies for borrowing with super

With tax free super post age 60, there has been a lot of movement in the super borrowing space recently - particularly in the self managed superannuation fund ("SMSF") space. For those that don't know a SMSF is a tax effective super fund with four or less family members that have pooled their superannuation for investment purposes. In terms of SMSF borrowing the smarter property investors and their advisers are beginning to understand that SMSF borrowing is simple, flexible, teax effective and build long term family wealth. For those not aware of how to use a SMSF for acquiring a portfolio of geared property investments it is vital to read on and learn about the most important revolution to ever hit property investing in Australia.

SMSF borrowing has mistakenly been described by advisers, accountants and financial planners as being an instalment warrant (generally a complex structured finance transaction). However what we are really looking at under section 67(4A) of the SIS Act bears no resemblance to an instalment warrant as we know it but is a simple investment loan with a simple bare trust inserted into the documentation trail for the SMSF trustee's protection. On the documentation required and cost of the documentation, the general cost for the bare "Custodian Trust" documentation allowing a SMSF to borrow is between $800 - $1,000.

Given the tax effectiveness of SMSFs for the over 60's as well as being able to use leverage to invest in direct property it may well be said that to invest in property anywhere else may be a big mistake even for younger members.

Consider my Top Eight SMSF Borrowing Strategies below to see what can really be done with the SMSF borrowing rules:

1. Simple but still the best: Borrow from a bank to acquire a residential, commercial, vacation or retirement property. LVR's extend up to 80%, terms are as long as 25 years, interest rates as low as 5.7% and interest only payment terms up to 15 years. If super is a long term investment the modern day simple SMSF investment loans fit the bill for ALL members of the fund.

2. Back to Back Lending: Using current equity in pre-existing investment properties to lend to the trustee of a fund to acquire commercial, development, vacation and residential property or a share portfolio.

3. JV SMSF Lending Arrangements: Having two or more SMSFs enter into a partnership borrowing arrangement through a simple or single Custodian Trust (often known as a bare trust).

4. Negatively Gear inside the Fund: Building a portfolio of geared investment assets in a Custodian Trust with low yield high geared investments being held for the accumulation side of the fund where the gearing deductions can be used to offset income and assesable contributions. For high yield investments seek to pay off any borrowing for transfer into the pension side of the fund where gearing deductions are worthless.

5. Transferring personal and related party assets as a loan not a contribution: Transferring listed shares, managed funds and business real property into a fund by way of a transfer of title to a Custodian Trust with the underlying value of the assets being recognised as a loan. If less than a 100% LVR is to be applied on the related party loan then the equity injected by the trustee of the fund is to be considered a contribution by the member or related party.

6. Forgiving loans as a contribution: For related party lenders, forgive some part of the loan each year as it is treated as a contribution by the Commissioner. This provides an opportunity of paying down the loan without messy round robin transactions. Use the maximum contributions caps each year or lose them.

7. Give the children a super leg up: Elder members of the fund can JV inside the fund with younger member's super equity to acqquire an investment asset subject to a borrowing arrangement with the younger member increasing their equity share over time with on-going salary sacrifice or non-deductible contributions.

8. The Custodian Trust as a pass through mechanism: Over time the client can acquire a wide range of assets using the Custodian Trust as a pass through vehicle where assets with attached gearing are held in the Trust and once paid they move to the fund, hopefully to the pension stage.