Can SMSF borrow? Yes they can - New Strategies
There are many
ways in which a SMSF can use gearing, such as investment in
1)
Geared Managed Funds
2)
CFD's
3)
Instalment Share Warrants
4)
Instalment Property Warrants
SMSF cannot borrow;
however, below we discuss other instances where Trustees
of a regulated SMSF can use some exception to this rule and strategies which
can be used by trustees.
Trustees can
- Borrow to pay a
beneficiary which the trustee has to pay by law or under the governing rules.
- To pay surcharge
or any advance tax for the fund.
This borrowing
should be for less then 90 days and the total amount borrowed must not exceed
10% of the value of the assets of the fund. 3. To cover settlement
of a share / unit trust etc transaction,
however, at the time of the relevant
investment decision
was made; it was likely that the borrowing would not be
neededThis
borrowing should be for less then 7 days and the total amount borrowed must not
exceed 10% of the value of the assets of the fund.
Strategy 1
June
2007 quarter saw new 19,874 (as per ATO report) SMSF being established, compared
to annual net 19,988 new funds in 2006 year and 17,802 in 2005. This was partly
because of a once in a life time opportunity to contribute $1Million un-deducted
in super.
This
contribution in some cases has created
a Problem.
The
writer has heard from advisors that many trustees contributed more than
$1 Million of their own money in super. This could be because this $1 Million cap
was from the budget night 10th May 06 to 30th June 2007
and not from July 06 to June 07.
These
trustees / funds now face paying tax at the highest marginal tax rate for un-deducted
contributions above $1 Million cap.
In
some cases some self employed trustees contributed $1 Million un-deducted of
their own money and $138,484 deductible contribution required to maximize
deductible contribution of $105,113 (for over 50 year old in 2007 year) under
the 75% deductible rule above the first $5000. What this means is that $33,371 will be treated as un-deductible contribution (difference between $138,484 less
105,113) and is now subject to tax @ 46.5% or tax of $15,517.
Solution
Our solution to this problem is only available to those
trustees who are over 55 years old.
In
the above scenario, when $33,371 was contributed extra, the trustees can take
the following steps
Step
1: Take $138,484 as a deducible contribution including $33,371 as un-deducted
contribution
Step
2: Take the $1 Million contribution as only for $966,629 as un-deducted. This
means that the total un-deducted contribution is limited to $1 Million for the
period 10th May 06 to 30th June 2007
Step
3: Take the balance of $1 Million contribution, ie $33,371 as a loan by the
super fund to pay a pension (see exemption 1).
Step
4: Put the fund on pension in June 2007. Please note that when the pension
commences in June, there is no need to draw a pension in the financial year
Step
5: Make a pension payment before retuning the loan (remember the purpose of the
loan is to make a payment)
Step
6: Since the loan has to be only for 90 days, make a withdrawal before 30th
September 2007.
Watch Out
The
above strategy should be used with caution, as date of deposit could make the
above strategy not possible and also note, if your governing rules (trust deed)
do not permit this loan or a benefit payment, this strategy cannot be used.
Below is our clause to deal with this situation. Feel free to update your trust
deed to ours before implementing this strategy.
119. The trustees powers shall include the following
powers: The trustee ;
·
may borrow funds
in compliance with the SIS Act;
Strategy 2
Can a SMSF have Margin Lending Account?
The simple answer is YES
Why & How
Many
times during the current volatile times, an opportunity comes to purchase an equity
at its low price and there are no funds to pay for them.
In
this case, a SMSF can borrow whilst it is in the process of selling some other
share or in the process of making new contributions within this window of
opportunity of 7 days. In these circumstances a margin loan can help trustees
to loop over the Australian Stock Exchange T + 3 days rule.
A
SMSF can have full fledged margin loan facility as long as each borrowing does
not extend to 7 days period and the loan does not go over the 10% of the fund
balance at any time. Which means the maximum a SMSF can borrow is $50,000 for a
fund size of $500K .
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