Self Managed Superannuation Fund (SMSF)

Lending Money to Your Self Managed Superannuation Fund (SMSF)

Have you ever considered the possibility of lending money to your SMSF in order to provide sufficient funds for an investment that you wish to make within your SMSF but where you have insufficient cash within the fund? Is this a valid tax saving transaction?

At DP Loewy & Co we have recently given thought to this matter and concluded in some circumstances this could be a valuable structure in maximizing the after tax investment return over the term of your investment. Further details are highlighted below and this is certainly a more attractive alternative than a limited recourse loan from a financial institution within the SMSF.

Let’s consider a client who has recently had available to them $900,000 which they would like to invest. We will also assume they have recently used their bring forward provisions which allows three years worth of non concessional contributions, or $450,000 already contributed to their SMSF, so no further non concessional contributions are available for another three years.

What may your options be?

1. Acquire the asset outside of super but you will be subject to income tax and capital gains tax at prevailing rates which could well be the top marginal rate.

2. Lend the $900,000 to your SMSF so income and capital gains are now subject to concessional rates that apply to superannuation which could be anything from 0-15%.

We need to be mindful however that the loan to the SMSF must be on an arms length basis so it will include interest to be charged at market rates. The loan will also need to be on a limited recourse basis. The downside in the short term will therefore be that if the income yields from the investment is less than the market rate interest charge, there will be a tax cost of the differential. You will effectively pay tax on interest received from the SMSF at your marginal rate while the SMSF gets a tax benefit at 15%.

The strategy to minimize this will be to make your maximum non concessional contributions at the earliest available time and offset these against the loan. In our example contributions of $450,000 in years 3 and 6 will eliminate the loan. Depending on the projected rate of returns, financial modeling has shown in most cases this strategy will result in a tax saving. If you have non concessional caps available the transfer to superannuation can be achieved earlier.

This strategy may have even greater appeal to those clients who are approaching or already turned 55 as rules with regard to accessing superannuation will mean you are more likely to want to commit assets to superannuation. You will also have the appeal of the tax free status of superannuation once you have converted to pension mode.

In particular we believe this strategy will work best with positively geared assets such as non residential real estate. If the yield is greater than the interest charge then there is an immediate tax benefit with the differential taxed at superannuation rates.

In short, by lending to your SMSF, you can invest earlier within the tax preferred superannuation regime to your overall benefit.

If you wish to consider use of this strategy please contact our office and we can run through the calculations with you and provide more detailed advice.

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