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.