The changes to the Superannuation Industry (Supervision) Act 1993 allowing self-managed superfunds to borrow has seen the introduction of a variety of SMSF Borrowing arrangements. Many of these have features that if executed would result in either breaches of the SIS Act, Income Tax Assessment Acts (1936 & 1997), Various State Duties legislation or a combination of all Acts.
The major issues that need to be addressed are the compliance with the SIS Act, any income tax ramifications including capital gains and stamp duty issues. The borrowing arrangement is one whereby the trustee of a self-managed superfund borrows from a lender, whom could be a related party, and uses the proceeds of that borrowing together with some of the superfunds own money to acquire an asset that is held by a company on bare trust for the superfund.
Another variation is where the self-managed superfund borrows to acquire units in a unit trust. The unit trust acquires the asset. The unit trust must have specific clauses to comply with section 67A of the SIS Act. This option provides a lot of benefits over the traditional bare trust arrangement.
Compliance with the SIS Act will be achieved if a borrowing is undertaken by the trustee of the SMSF and the lenders rights in relation to the borrowing are limited to the asset acquired or a replacement asset. The asset can be held by a custodian on a bare trust for the trustee of the self-managed superfund. Alternatively, the borrowing can be used to acquire units in a unit trust. If this method is to be used advice should be obtained.
Some concerns have been raised in relation to members giving guarantees and the possible application of section 295-550 of the Income Tax Assessment Act (i.e. the non-arm's length provisions). Although there exists a small risk that these provisions may apply the Australian Taxation Office have indicated that they will not be seeking to apply the non-arm's length income provisions where a member gives a guarantee.
The most overlooked component of SMSF Borrowings is the capital gains tax provisions and their application where the trustee of the SMSF is not absolutely entitled to the asset as against the custodian.
