Superannuation is a powerful tool for securing your financial future, and as an accountant, I often receive questions from professionals—including those in the dental industry—on how they can leverage their superannuation funds to grow their wealth. One of the most common questions revolves around whether superannuation funds can borrow money to invest. While the idea of borrowing within a superannuation fund may seem appealing, particularly for dental professionals looking to invest in property or other assets for retirement, it’s crucial to understand the regulations and guidelines governing this practice.
In Australia, borrowing within a superannuation fund is allowed but is subject to strict rules to ensure compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act). This article will outline the key borrowing rules and considerations for dental professionals looking to leverage their superannuation funds through borrowing.
Limited Recourse Borrowing Arrangements (LRBAs)
The primary method through which superannuation funds can borrow is known as a Limited Recourse Borrowing Arrangement (LRBA). LRBAs are a specific type of loan that allows a self-managed superannuation fund (SMSF) to borrow money to purchase an asset, typically property, with the loan being limited to the asset itself. This means that if the SMSF cannot repay the loan, the lender’s recourse is limited to the asset purchased with the borrowed funds, not the entire SMSF’s assets.
Under LRBAs, super funds must meet several conditions:
- Asset Purchase: The SMSF can only use the borrowed funds to purchase a single asset or a collection of identical assets (such as multiple units in a building). This is most commonly seen in property investments.
- Sole Purpose Test: The asset must meet the “sole purpose test,” which means it should only be used to generate retirement benefits for the SMSF members. The property cannot be used for personal or non-retirement purposes during the term of the loan.
- No Improvement on Borrowed Asset: If the SMSF is borrowing to purchase a property, it is prohibited from making improvements or alterations to the property with borrowed funds. However, non-borrowed funds can be used for improvements after the purchase.
SMSF Borrowing Restrictions
There are specific restrictions around SMSF borrowing to ensure that it is only being used for the benefit of the superannuation members. Some key borrowing restrictions include:
- Borrowing Limits: LRBAs must be used to acquire assets that are not held in the SMSF at the time of the loan agreement. Furthermore, the SMSF is not permitted to borrow funds for the general purpose of acquiring any asset, but only for acquiring assets specifically allowed by the superannuation legislation.
- Repayment Terms: Lenders typically impose shorter repayment terms on SMSF loans—often between 5 and 15 years. This means the SMSF must ensure it can meet these repayment requirements without impacting its members’ retirement savings.
- Geared Investment Strategy: The SMSF must have an appropriate investment strategy in place before borrowing. This strategy must outline how the fund will manage any risks associated with the geared investment and ensure the fund can meet its obligations.
Types of Assets You Can Borrow to Purchase
While the most common asset that SMSFs borrow to purchase is property, the following types of assets are generally allowed:
- Residential property (as long as it is for investment purposes and complies with the sole purpose test)
- Commercial property
- Listed shares or managed funds (if they meet specific criteria under LRBA rules)
It’s essential to note that certain assets are excluded from SMSF borrowing arrangements. For example, an SMSF cannot borrow to acquire collectables or personal use assets, such as artwork, jewellery, or antique furniture.
Regulatory Compliance and Reporting Obligations
The Australian Taxation Office (ATO) closely monitors SMSF borrowing arrangements to ensure compliance with the laws. Failing to meet the regulatory requirements can result in significant penalties or the disqualification of the SMSF’s concessional tax treatment. It’s crucial to stay on top of your fund’s compliance obligations, which may include:
- Annual audits: Your SMSF will be required to undergo an annual audit to ensure all rules are being followed, including those relating to borrowing arrangements.
- Loan documentation: All borrowing arrangements must be documented in a formal agreement that meets legal requirements. This will help protect both the fund and the lender.
- Asset management: The asset purchased through the LRBA must be managed in accordance with the SMSF’s investment strategy. Non-compliance can result in penalties.
Consulting with Professionals
Navigating the borrowing rules within a superannuation fund can be complex, especially for professionals like dentists who are focused on managing their practice. It is highly recommended that dental professionals consult with experienced financial advisors, accountants, and SMSF specialists before proceeding with any borrowing arrangements. These experts can help you:
- Develop a sound investment strategy that aligns with your retirement goals
- Ensure compliance with all relevant regulations
- Minimise risks associated with borrowing through an SMSF
Conclusion
The opportunity to borrow within a superannuation fund can be a valuable tool for dental professionals looking to build wealth for their retirement. However, it comes with strict regulations that must be adhered to in order to avoid penalties and ensure the investments are made in accordance with superannuation laws.
Before proceeding with any borrowing strategy, dental professionals should consult with financial advisors and accountants to ensure they are following the appropriate guidelines and making informed decisions. By doing so, you can take advantage of superannuation borrowing while safeguarding your future retirement.
Author
Cindy Jia
Senior Manager – Ecovis Clark Jacobs