Self-Managed Super Fund Borrowings
The general rule is that self-managed super funds are prohibited from having any borrowings.
As an exception to that rule, since 2007 super funds can finance investments with limited recourse borrowing arrangements if they comply with section 67A of the SISA.
Limited recourse borrowing arrangements must comply with the following:
- The borrowing is only permitted over a single asset or a collection of identical assets that have the same market value, e.g. one property or one parcel of BHP shares.
- The recourse of the lender against the super fund on default is limited to the single asset that was financed under the limited recourse loan. This means that all the super fund’s other assets are protected.
- Super funds cannot borrow to improve an asset (for example real property).
The advantage of borrowing in a super fund is that the capital gains can be magnified and also the super fund benefits from negative gearing (so tax can be saved).
All borrowing entails risks so the super fund needs to ensure that it has sufficient income (from investment earnings or employer/member contributions) to meet the loan repayments and expenses on the borrowings.
The ultimate aim with self-managed super funds is to build a portfolio of investment earning assets (a mix of term deposits, shares and property), so that on retirement when the fund is put into the pension phase, 100% of the fund earnings will be tax free.