Trustees of a Self-Managed Superannuation Fund (SMSF) are prohibited from borrowing or maintaining an existing borrowing of money under subsection 67(1) of Superannuation Industry (Supervision) Act 1993 (SISA) except in very limited circumstances as listed under subsections 67(2) to 67(6).
Borrowing provisions are designed to ensure that the accumulated benefits in an SMSF are not directly exposed to the risks associated with geared investments and to stop lenders from acquiring a claim over SMSF assets.
One important exception under subsection 67(2) is a temporary borrowing to make a payment to a beneficiary as long as all of the following conditions are satisfied:
✔ the payment is required by law or by the governing rules of the fund
✔ the trustee would not be able to make the payment if the borrowing was not permitted
✔ the period of the borrowing does not exceed 90 days
✔ the total amount borrowed would not exceed 10% of the value of the assets of the fund
The term “borrowing” is not defined in the law, and therefore takes its ordinary meaning within the context of the SISA. SMSF Ruling 2009/2 considers a borrowing to have the following characteristics:
- a temporary transfer of an amount of money from one entity (lender) to another (borrower); and
- an obligation or an intention on the part of the borrower to repay that amount to the lender.
Therefore, in order to be considered an exception under subsection 67(2), the SMSF must have an intention to repay the amount at a later date.
While the exception to borrow money to make a payment to a beneficiary is allowed under subsection 67(2), trustees need to consider how the borrowing may affect other parts of their trustee obligations, namely:
|Sect. 62||The sole purpose of the borrowing must be to provide benefits to a member as required by law.|
|Sect. 52B||The trustee must formulate and give effect to an investment strategy that considers risk, return, diversification and liquidity.|
|Reg. 13.14||The trustee must not give a charge over, or in relation to, an asset of the fund.|
To summarise, under subsection 67(2) of the SISA, an SMSF can borrow money to pay pension benefits as required by law so long as the amount borrowed is less than 10% of the value of the total assets of the SMSF and the period of the borrowing is less than 90 days. Given this, we recommend trustees also consider what effects this may have on the rest of their obligations under the SISA and to seek professional advice on uncertain matters.
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