Until recently, there were a number of unanswered questions about DIY super funds and their ability to borrow to invest. In response, the Government has provided clarification about the type of activities that are permitted, issuing new rules from 6 July 2010. Though still a complex area, the rules now provide some certainty for the more than 420,000 DIY super funds in Australia that may be considering a gearing strategy.

New legislation provides clarity

The previous laws allowed DIY super fund trustees to borrow for investment purposes in some circumstances only, using limited recourse loans. However, the laws were unclear on a number of matters, such as the use of personal guarantees, the replacement of assets, and whether multiple assets could be acquired.

Chris Balalovski, Senior Manager Strategic Advice for Perpetual Private Clients, says that the new rules clarify these and other issues, providing greater certainty to DIY super fund trustees who want to borrow to invest as part of their accumulation strategy.

Consider your options carefully

Chris says that while borrowing to invest can be great tool for DIY super funds to help maximise their assets, trustees should seek professional advice first.

‘Borrowing still remains a complex DIY super strategy and trustees must understand the risks involved. One of the key considerations is the DIY super fund’s trust deed. This needs to be carefully reviewed and, if necessary, updated to allow the trustees to borrow.’

'It’s also just as important to ensure that borrowing accords with the fund’s investment strategy. This is crucial, as the entire fund may become non-complying and could, therefore, lose its tax concessions. In addition, if the holding trust documentation is not prepared and executed correctly, it could trigger unexpected stamp duty and capital gains tax liabilities.’

Advice remains essential

To help mitigate the risk of not complying with the rules, Chris recommends seeking financial advice. ‘A sound borrowing strategy should take into account the overall affairs of the DIY super fund, its investment strategy, timeframe to retirement and the income needs of its members. A financial adviser can help you to ensure that borrowing is appropriate for your fund and if undertaken, done in a compliant manner.’

If you need advice about your DIY super fund, contact Perpetual Private Clients on 1800 631 381 or find out more about SMSFs and borrowing at our upcoming seminar.

Find out how effective SMSF borrowing can maximise returns with the right property. Educational seminars in Sydney and Perth Presented by Perpetual Private Clients and Capital 360 (independent property investment strategist and buyers agents), this seminar will guide you through the key elements required for effective SMSF borrowing and property investing. This seminar will be of benefit sto elf managed super fund (SMSF) members and trustees and those considering establishing an SMSF to invest in property. Register today to find out more. Sydney: Saturday, 30 October 2010 Melbourne: Saturday, 13 November 2010

Perpetual Private Clients advice and services are provided by Perpetual Trustee Company Limited (PTCo), ABN 42 000 001 007, AFSL 236643. This information has been prepared by PTCo. It contains general information only and is not intended to provide you with advice or take into account your objectives, financial situation or needs. The taxation information contained in this document is not taxation advice and should not be relied upon as such. The case studies presented may differ from your financial circumstances and result in different outcomes. You should consider whether the information is suitable for your circumstances and we recommend that you seek professional financial, tax and/or legal advice. The information is believed to be accurate at the time of compilation and is provided by PTCo in good faith. However, the statements including assumptions and conclusions are not intended to be a comprehensive statement of relevant practice or law that is often complex and can change. No company in the Perpetual Group guarantees the performance of any fund, stock or the return of an investor’s capital. Past performance is not indicative of future performance. PTCo does not warrant the accuracy or completeness of any information included in this publication which was contributed by a third party. Any reference to the Perpetual Group means Perpetual Limited, ABN 86 000 431 827, and its subsidiaries.

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