Not many takers for SMSF loans

Only a very small number of self-managed superannuation fund trustees have borrowed to acquire assets for their funds since a change to the super law in 2007 allowed funds to borrow money.

The chief executive of the SMSF Professionals' Association of Australia, Angela Slattery, said a survey conducted by her association revealed that 0.1 per cent of SMSFs have loans.

The SPAA found that only about four per cent of trustees of the country's 460,000 SMSFs said they were interested in looking at gearing as part of a wealth accumulation strategy for their funds.

Slattery, who was speaking at the RFi Australian Mortgage Conference yesterday, said: "There is growth in the number of products in the market and a majority of advisers say SMSF lending is the next wave."

However, the complexity of the product deters trustees.

There is a lot of structuring required. The loan must be of a particular type (limited recourse) and the asset must be held in a separate security trust until it is paid for.

But the biggest obstacle for many would-be borrowers is the "single acquirable asset rule".  Under this rule, property cannot be improved - buildings cannot be substantially renovated and vacant land cannot be subdivided, nor can new dwellings be built on vacant land.

The single acquirable asset makes it impractical to use a loan to finance the purchase of shares (the fund would need a separate loan for each shareholding).

The Australian Taxation Office has previously applied a strict test to this rule, tending to rule that changes to a building were improvements when the trustee said they were repairs.

Last September, the ATO issued a ruling that clarified its interpretation of the single acquirable asset rule and indicated that it would take a more flexible approach.

Slattery says trustees remain confused and wary, however.