On September 24, 2007 there were improved changes made to super funds. Firstly the Reasonable Benefit Limits and limitless tax-fee retirement were eliminated. On top of that, super funds can now borrow too, which makes super ideal for gearing up direct property into a self-managed super fund (SMSF).
Superannuation, and in particular SMSFs, have become the asset ownership structure of choice in more situations. Even clients with a balance lower than the traditionally accepted threshold of $500,000 should still consider an SMSF over a public offer fund.
The change has arisen since a review by the Government relating to the use of SMSFs and instalment warrants.
The regulator’s held the opinion that the use of instalment warrants may actually be a breach of law, in spite of their popularity.
The Superannuation Industry (Supervision) Act 1993 (SISA) was therefore amended which will permit the use of borrowing similar to instalment warrants for any asset that an SMSF could otherwise invest in.
These new powers are embodied in section 67(4A), which enables an SMSF to borrow to fund the acquisition of an asset on the following conditions:
- Recourse of the lender against the SMSF is limited to the asset itself;
- The asset is an asset the SMSF could otherwise legally acquire (if it had the funds);
- The asset is held on trust for the SMSF;
- The SMSF acquires a beneficial interest in the asset from the outset; and
- The SMSF has the right to acquire legal title on making one or more payments.
Benefit of gearing
Together, these changes enable SMSFs to harness the four key wealth creation forces:
- The magic of compounding;
- The power of leverage;
- The tax benefits of negative gearing; and
- The low or zero tax payable in the super environment.