Self-Managed Super Funds (SMSFs) offer Australians a degree of control over their retirement savings. One strategy to potentially grow your super balance is through self managed super fund borrowing. But before you dive in, it’s essential to understand the ins and outs of SMSF borrowing.
What is SMSF Borrowing?
Setting up a self managed super fund borrowing involves your fund taking out a loan to purchase assets. The most common asset is property, but it can also extend to shares or other investments. The loan is secured against the asset purchased, meaning if the fund defaults on the loan, the lender can only recover the asset, not other fund assets.
How Does It Work?
Typically, an SMSF uses a Limited Recourse Borrowing Arrangement (LRBA). This means the fund's liability is limited to the asset purchased. The process involves:
- Identifying an asset: Decide what you want to purchase.
- Securing finance: Find a lender willing to provide an LRBA.
- Setting up a trust: A bare trust is often used to hold the asset.
- Making repayments: The SMSF makes regular repayments on the loan.
Potential Benefits
- Diversification: Allows investment in asset classes that might not be accessible with current funds.
- Tax advantages: Rental income from property can be tax-effective within the fund.
Risks and Considerations
- Gearings: High levels of debt can amplify losses if asset values decline.
- Complexity: SMSFs require careful management, and borrowing adds another layer of complexity.
- Borrowing costs: Interest on the loan reduces the fund's overall returns.
- Compliance: Strict rules govern SMSF borrowing. Non-compliance can lead to significant penalties.
Is It Right for You?
SMSF borrowing isn't suitable for everyone. Factors to consider include:
- Risk tolerance: Can you handle potential fluctuations in asset values?
- Financial knowledge: Do you have the expertise to manage investments and loans?
- Time commitment: SMSFs require ongoing administration.
- Diversification: Do you already have a diversified investment portfolio?
Due to the complexities involved, it's crucial to seek advice from a qualified financial advisor. They can assess your financial situation, investment goals, and risk tolerance to determine if SMSF borrowing is right for you.
