The Government’s Financial Services Inquiry recently recommended the removal of an exception that allows superannuation funds to borrow. While this is currently just a recommendation and unlikely to affect existing borrowings, it is a good time to assess whether you can make the most of this strategy to boost your retirement savings over the long term.
Why borrow in your superannuation fund?
Superannuation funds are generally banned from borrowing in order to limit the risk of loss of your retirement savings. In 2007, an exception to this general prohibition was created to allow for Limited Recourse Borrowing Arrangements (“LRBAs”).
Reasons you may consider arranging for your superannuation fund to borrow money might be:
- To increase the value of growth assets inside a concessionally taxed environment
- Your investment strategy allows the purchase of a particular investment (eg property) but there are insufficient resources in your superannuation fund to do so, and/or
- Your investment return (eg dividends) is expected to exceed the cost of borrowing.
How does a LRBA work?
The relevant asset that is purchased is held in a holding (or bare) trust in order to protect the fund’s other assets from any risk of a default on the loan. The holding trust also ensures that the fund remains a complying superannuation fund maintained for the primary purpose of providing retirement benefits to its members. The fund makes the loan repayments and receives the income from the asset because it is the beneficial owner.
When will the rules change?
As noted above, the change is a recommendation at this point so it is not clear when the ability to enter into LRBAs will actually be removed. We do know, however, that the Government usually announces such measures in May in the Federal Budget, and often backdates any new related legislation to that date.
How can Morrows help?
The Morrows team is skilled in assessing the appropriateness of this strategy for different individuals, as well as other options for our clients. We specialise in providing advice and implementation services to help you maximise your superannuation fund for your retirement.
Contact Morrows to discuss whether this arrangement is right for you or other strategies may be more appropriate. Our Advisors would be pleased to provide you with strategic advice on borrowing in superannuation and, if needed, our Legal team will be able to prepare the relevant documentation for you in order to ensure that your financial and retirement goals are achieved.