There is a great deal of interest at the moment in using borrowing trusts within SMSFs at the moment and their potential for increasing the investment exposure of your super savings. However there are a couple of pitfalls with the new s67A borrowing trusts and one in particular that spells real danger for the most common asset purchased – property.
The borrowing rules can be a tremendous opportunity, however the definition within s67B of the Act of a replacement asset is dangerously restrictive. You may recall that the borrowing trust can be used to purchase an asset or a replacement asset. However s67B defines what an acceptable replacement asset would be.
The problem is that s67B would not allow a property to be improved, or replaced in the event of an insurance event. This could potentially be devastating if, for example, your property was destroyed by flood. You may be left with an insurance payout to help reduce the debt, but you could not use the money to reinstate the asset without also unwinding the borrowing structure, which would usually mean selling the asset at a very inopportune time.
A possible solution to this problem is the use of a Regulation 13.22C trust, but this comes with its own restrictions. Not the least of which is that a bank is unlikely to lend to your SMSF when the security would be units in a trust, rather than the property itself. This restricts the use of this type of trust to circumstances where the borrowing is from a related party.
It’s important that trustees understand the borrowing rules very well before setting up this structure. Don’t get rushed into it by slick advertising, pushy salespeople or the promise of missed opportunity. The opportunity might be the experience of unwinding a horribly expensive compliance nightmare.