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4. Borrowing Inside SMSFs

Borrowing inside a SMSF is summarized in Dollar Notes dated 7 November 2008 titled “SMSFs Borrowing”, which can be downloaded at the client only section of www.mcmasters.com.au or here: Dollar Notes SMSFs Borrowing to Invest.

The ATO issued a Taxpayer Alert on SMSFs borrowing in April 2008 and this document can be downloaded here: ATO Taxpayer Alert on SMSF Borrowings

Borrowing inside a SMSF is not always a good idea and we generally recommend doctors think carefully before doing so. Our reasons include:

• the ATO does not like these arrangements and makes it clear it will not be lenient with penalties should trustees inadvertently breach any of the rules;
• the borrowing structure is costly and expensive to set up (although this is less of a problem in 2010 as some banks have brought relatively cheap packages to the market);
• the interest rate is too expensive, and the security required is too extensive;
• extra annual administration costs; and
• interest is either deductible at no more than 15% effective tax rate, or not deductible at all, compared to effective deduction rates of up to 46.5% outside the SMSF. This means the tradition plus factor connected to gearing, ie an immediate large tax deduction for the interest, is not available, making SMSF gearing very tax inefficient.

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