Monday, 23 August 2010
There are a number of important advantages for a SMSF trustee that successfully carries out a borrowing arrangement to acquire shares, managed funds, residential property or commercial property:
1. It maximises the wealth effect in the SMSF in times when assets of the fund are rising. However care should be had in falling markets – although there is the benefit that there are no margin calls due to the non-recourse nature of the loan.
2. The borrowing can be for a short period or for a period of up to 20+ years (if related party financing is used) allowing it to be structured to the underlying circumstances of the fund members.
3.Members and related businesses can act as lenders provided that all lending is at arm’s length – see the Smith SMSF example above.
4. It increases the flow of non-contribution style funds into the SMSF particularly where the members of the fund have used up their contributions capacity. Care must be had to ensure that there is a genuine borrowing and not a contribution arrangement otherwise the Commissioner may deem the borrowing to be a non-concessional contribution.
5.Future income and capital gains on underlying assets are taxed concessionally in a SMSF and may even be tax free where the assets are held for pension purposes.
For SMSF Strategies borrowing documentation including the mandatory Bare Trust, self financing Loan Agreement or upgrade of SMSF deed for borrowing purposes - please see your adviser or contact us at admin@smsfstrategies.com