What you must understand about the SMSF Loans

Gone are the days when an SMSF could not borrow fund and invest in assets. However, several rules related to taxes were relaxed in 2007. The rules associated with SMSF loans have been reversed in recent years. The most current regulations provide for the following certain rules and restrictions.

The best part is that the Federal government has kept its promise by not making any major change in the SMSF loan rules. The treasurer in his Budget speech did not touch the limited recourse borrowing arrangements (LBRAs). However, he surely made a pre-budget commentary and said that the government may improve on the Financial System Inquiry’s using a part of the budget.

Now, there are several reasons for SMSF borrowing.

ü  SMSF borrowing provides that funds can be invested in assets where they do not have sufficient cash allowing for purchase.  The SMSF loans also provide for tax deductibility on franking credits, interest payments within the funds. The fund can be used to diversify various kinds of investments and help in improving income and growth. 

ü  The different types of investments covered by SMSF loans include residential and commercial property, shares, land, factories, machinery and also the farms. The restrictions applied to the SMSF loans are stringent. However, in some cases, they are subject to interpretation.

ü  The ease of borrowing makes the SMSF loans the preferred option. The lender in the case of SMSF loans should not necessarily be a bank or a financial institution, but it can be a family member, business partner or even a fund member. Repayments must be made from investment earnings or superannuation contributions.

Challenges associated with borrowing the SMSF

Complex rules are linked with the superannuation loans. For example, SMSF borrowing of the assets are just under limited resources borrowing arrangement (LRBA). This states that only one asset can be acquired from the collection of identical assets under a single borrowing arrangement. The single asset becomes the security for the loan. It is held in the holding trust till the repayment of the loan. Assets cannot be replaced or improved on except in certain exceptional cases.  The assets can be repaired but many times the difference between repairs and improvement may not be clear cut. However, the difference is understood in this example. Renovation of an older home may be required and it is allowed. However, adding an extension is clearly not permitted, at least not from the borrowed fund.

You can get more clarity on using the SMSF loans and see a home you can leverage their various benefits reaching out to the experts at Global Capital.