Borrowing

All investments by your SMSF must be made on a commercial ‘arm’s length’ basis. The purchase and sale price of fund assets should always reflect true market value, and the income from fund assets should always reflect a true market rate of return.

Generally:

  • You can't buy assets from, or lend money to, fund members or other related parties (there are some exceptions to this rule)
  • Your fund can't borrow money.

 

If you don't comply with the investment restrictions the ATO may impose significant penalties, including disqualifying you as a trustee and even prosecution. It's a good idea to speak to us to make sure your investments comply with the law.

 

Here is some further reading on related parties, investments and collectables:

Related parties and relatives

Several investment restrictions apply to transactions involving 'related parties' of your fund and 'relatives of members'. No one associated with your fund should get a present-day benefit from its investments.

Your fund needs to be maintained for the sole purpose of providing death or retirement benefits to your members or their dependants.

A 'related party' of your fund includes:

  • All members of your fund
  • Associates of fund members, which include
    • The relatives of each member
    • The business partners of each member
    • Any spouse or child of those business partners
    • Any company the member or their associates control or influence
    • Any trust the member or their associates control.
  • Standard employer–sponsors, which are employers who contribute to your super fund for the benefit of a member, under an arrangement between the employer and a trustee of your fund
  • Associates of standard employer–sponsors, which include
    • Business partners and companies or trusts the employer controls (either alone or with their other associates)
    • Companies and trusts that control the employer.

 

A relative of a member means any of the following:

  • A parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or their spouse
  • A spouse of any individual specified above.
Loans and early access

You can't lend money or provide direct or indirect financial assistance from your fund to a member, or a member’s relative. For example, you can't use fund assets to guarantee a personal loan for a member.

Loans made by your SMSF must be in the best interests of members and comply with your investment strategy. If a loan arrangement is not in your members' best interests, your SMSF could be made non-complying and ineligible for concessional tax rates.

Get advice before entering into loan arrangements. If you still decide to lend money from your SMSF, make sure the loan is conducted on a commercial, arm's length basis.

Remember, you are ultimately responsible for running your SMSF.

Acquiring assets from related parties

Your fund can't acquire an asset from a related party unless it is acquired at market value and is:

  • A listed security (for example, shares, units or bonds listed on an approved stock exchange)
  • Business real property
  • An in-house asset, provided the market value of your fund’s in-house assets does not exceed 5% of the total market value of your fund's assets
  • An asset specifically excluded from being an in-house asset.

 

If the asset is acquired at less than market value (including no cost, such as an in specie contribution), the difference between the market value and the amount actually paid should be recorded as a contribution.

The Valuation guidelines for self-managed super funds will help you comply with these requirements.

Business Real Property

Business real property is an exception to the in-house asset and related party acquisition rules.

Business real property generally means land and buildings used wholly and exclusively in a business.

If business real property is used in a primary production business such as a farm, it can still meet the test of being used wholly and exclusively in a business even if it contains a dwelling that is used for private or domestic purposes. The dwelling must be in an area of land no more than two hectares and the main use of the whole property can't be for domestic or private purposes.

You need to ensure the level of investment in business real property still meets the investment strategy of your fund, including diversification of assets, liquidity and maximisation of member returns in your fund.

As with other super fund assets, there can't be a loan or covenant (charge) over an asset (unless the asset was acquired under a limited recourse borrowing arrangement).

Borrowing

Your fund can borrow money only in very limited circumstances. These circumstances include:

  • Borrowing money for a maximum of 90 days to meet benefit payments due to members or to meet an outstanding surcharge liability (the borrowings can't exceed 10% of your fund’s total assets)
  • Borrowing money for a maximum of seven days to cover the settlement of security transactions if the borrowing does not exceed 10% of your fund’s total assets (you can only borrow to settle security transactions if, at the time the transaction was entered into, it was likely that the borrowing would not be needed)
  • Borrowing using instalment warrants or limited recourse borrowing arrangements that meet certain conditions.

 

A trustee can use a limited recourse borrowing arrangement to fund the purchase of a single asset (or collection of identical assets that have the same market value) to be held in a separate trust.

Any investment returns earned from the asset go to the SMSF trustee. If the loan defaults, the lender's rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF.

Collectables and Personal Use Assets

Collectables and personal use assets are things like:

  • Artworks
  • Jewellery
  • Vehicles
  • Boats
  • Wine

 

Investments in such items must be made for genuine retirement purposes, not to provide any present-day benefit.

Collectables and personal use assets can't be:

  • Leased to, or part of a lease arrangement with, a related party
  • Used by a related party
  • Stored or displayed in a private residence of a related party

 

In addition:

  • Your investment must comply with all other relevant investment restrictions, including the sole purpose test
  • The decision on where the item is stored must be documented (for example, in the minutes of a meeting of trustees) and the written record kept
  • The item must be insured in the fund's name within seven days of the fund acquiring it
  • If the item is transferred to a related party, this must be at market price as determined by a qualified, independent valuer.

 

For collectables and personal use assets you held before 1 July 2011 you had until 30 June 2016 to comply with these rules.

On this page:

 

Definition of Collectables and Personal Use Assets

Collectables and personal use assets are:

  • Artwork – including
    • Paintings
    • Sculptures
    • Drawings
    • Engravings
    • Photographs
  • Jewellery
  • Antiques
  • Artifacts
  • Coins, medallions or bank notes
    • Coins and banknotes are collectables if their value exceeds their face value
    • Bullion coins are collectables if their value exceeds their face value and they are traded at a price above the spot price of their metal content
  • Postage stamps or first-day covers
  • Rare folios, manuscripts or books
  • Memorabilia
  • Wine or spirits
  • Motor vehicles and motorcycles
  • Recreational boats
  • Memberships of sporting or social clubs.

 

Definition of Private Residence

A private residence includes all parts of a private dwelling (above or below ground), the land on which the private residence is situated and all other buildings on that land, such as garages or sheds.

Usage

Collectables and personal use assets can't provide a present day benefit, so they can't be used by members or related parties.

For example, if your SMSF owns a vintage car, related parties can't drive it for any reason – not even for maintenance purposes or to have restoration work done – because this constitutes use of the asset. However, a person who is not a related party can drive the vehicle for such a purpose.

Display or storage

Collectables and personal use assets must not be stored in the private residence of any related party. If they were acquired before 1 July 2011 you had until 1 July 2016 to meet this requirement.

You can store (but not display) collectables and personal use assets in premises owned by a related party, provided it is not their private residence. They can't be displayed because this means they are being used by the related party.

For example, if your SMSF invests in artwork, it can't be hung in the business premises of a related party where it is visible to clients and employees.

Remember to keep a record of the reasons for deciding where to store the assets.

Insurance

Collectables and personal use assets purchased by the fund must be insured in the name of the fund within seven days of the purchase.

As part of the decision to invest in collectables and personal use assets, you need to consider the availability and cost of insurance. If your fund made the investment and you find you can't obtain insurance, contact both your fund's SMSF auditor and the ATO to try to rectify the situation.

Your fund's collectables and personal use assets may be insured under separate policies or collectively under the one policy, but it must be in the name of the fund. You can't, for example, insure the assets as part of a trustee's home and contents insurance.

If you acquired a collectable or personal use asset prior to 1 July 2011, you must have insured it in the name of the fund prior to 1 July 2016 to comply with the rules.

Leasing

You can only lease collectables and personal use assets to an unrelated party and the lease must be on arm's length terms.

For example, your SMSF can lease artwork to an art gallery provided the gallery is not owned by a related party and the lease is on arm's length terms.

Selling

Collectables and personal use assets can be sold to a related party provided the sale is at market price as determined by a qualified, independent valuer.

  • A valuer is qualified either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community.
  • A valuer is independent if they are independent of the interests of the fund. This means the valuer should not be a member of the fund or a related party of the fund (for example, an investment partner).

 

If your fund acquired the collectable or personal use asset before 1 July 2011 and sold it before 1 July 2016, the transaction does not need to be supported by a valuation determined by a qualified independent valuer. However, the transaction must still have taken place on arm's length terms.

In-house assets

An in-house asset is any of the following:

  • A loan to, or an investment in, a related party of your fund
  • An investment in a related trust of your fund
  • An asset of your fund that is leased to a related party.

 

There are some exceptions, including:

  • Business real property that is leased between your fund and a related party of your fund
  • Some investments in related non-geared trusts or companies
  • Most investments and loans entered into before 11 August 1999

 

In-house assets can't be more than 5% of your fund’s total assets.