Questions To Ask When Considering SMSF Loans
SMSF loans, just like SMSF borrowing, is a way of financing the purchase of assets for a retirement fund. SMSF stands for self managed super funds, a “Do it yourself” way of saving and managing investments for your retirement.These are also commonly referred to as warrant trust loans, instalment warrants, SMSF Trust loans, SMSF borrowings, limited recourse loans, or limited recourse borrowings.There are a number of compliance and administrative burdens that come with setting up and managing an SMSF, these include extensive documentation of the investment and risk management strategies, documentation of meeting minutes and transactions, annual independent SMSF audits, and legal compliance.
Usually a larger amount of money is required to set up a SMSF finance, as the sum is then used to make investments for the purpose of retirement. That’s why some people choose to borrow to purchase assets, and therefore consider an SMSF loan.Such loans require an additional amount of compliance work to ensure all transactions are for the benefit of retirement. These compliance aspects include legal requirements, documentation, additional costs to be considered and the requirements for the SMSF trustee.There are a number of questions that should be asked before taking out an SMSF loan. Here are a few questions to get you thinking:
• Is the investment for the sole purpose of providing member benefits? (This is called the Sole Purpose Test.)
• Do the loan and the desired investment align with the funds investment and risk management strategies and procedures?
• Are the terms and conditions of the e transaction, and the borrowing arrangement as if it were done at “arm’s length”?
• Does the super fund have sufficient funds and cash flow to repay the ongoing interest payments and principle payments?
• Have you assess the investment from a commercial point of view, considering the projected returns, as well as expenses, such as tax, and advisory fees?
• Have you sought expert advice on whether your planned loan complies with all the legal and compliance requirements?
If you do decide that the investment fits all the criteria and is compliant with all rules and regulations, you can seek an SMSF loan from a number of lenders. In fact, the lender can be a bank, a non-bank financial institution, a specialist financier, margin lender, or a private party.Whatever your decision with regards to SMSF loans, it is essential that you seek independent expert advice. This advice could come from a lawyer, a financial planner, a superannuation accountant, an independent SMSF auditor or any other industry specialist.
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