Borrowing and Pensions: are They Compatible with Self-Managed super fund?

When you have a Self-Managed super fund, it can be confusing and time consuming searching for all of the answers to the questions you may have. Here’s an easy way to understand the basics of SMSF borrowing and pensions, as well as their compatibility.

  1. Viability

When considering whether or not you should borrow money and use your SMSF to help cover the cost, viability is a critical factor. The issue here is not whether you can or cannot do it, as you certainly can. The issue is whether or not you should based on your particular circumstance. What this means is that if you need to borrow money to cover an expense and you have maxed out what you can receive from your SMSF for the year, you can use your SMSF as a pledge to cover the costs. This is only recommended with caution, as in some cases, the SMSF may not be able to truly cover the cost of the loan while in others it is not an issue. This is why you must exercise caution when looking into this line of thinking and why it is definitely more of an individualized situation rather than an overall generalized statement.

  1. Cash Flow

Cash flow is a huge factor to consider in order to help determine viability as well as understand better the long term effects of what this type of loan would do. If your Self-Managed Superannuation Fund is able to meet the minimum requirements which would be to cover the cost of the loan as well as your bare minimum pension payments, then this may be something you can do and not experience long term negative effects. However, if your SMSF is somewhat depleted or you have issues which would cause pledging funds to be financially unrealistic, this is definitely something you would want to wait on or step away from entirely. It is solely based on your SMSF and your particular situation.

  1. Taxation

One of the big problems with this sort of borrowing is that it’s nearly impossible to determine, without further discussion with your financial advisor, whether or not you will suffer taxation on your previously non-taxed SMSF funds. The issue here is that since you are now incurring expenses on your SMSF that are not regular and therefore may very well not be covered under the usual non-taxable portion of your fund. You could very well lose the benefits of the non-taxable portion and not be able to claim a deduction on your taxes under the same given terms. This is a big reason to exercise caution and to consider with care whether your capital and gain from borrowing will truly outweigh the issues and expenses that you will experience should you choose to do so.

In conclusion, when considering borrowing from your Self-Managed Superannuation Fund and your pension account, it is absolutely key that you consult your financial advisor and that you exercise care and caution so that you have the best possible outcome with your investment and future finances.

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