Can I Borrow From a Super Fund for Horses?

If ever there was a time of the year where attention turns to buying into a horse, it's the period between the ceasing of the Melbourne and Sydney Spring Carnivals and the start of the yearling sales circuit, starting early January at the QLD Magic Millions.

The glitz and glamour and lucrative stakes on offer at these carnivals gives many a racing lover a great incentive to want to be part of the thrill and fun of racehorse ownership. The upcoming sales circuit comes at the perfect time to start the journey.

For many future owners, there is often a problem. Cash-flow can be tight, for all sorts of reasons, and thus accessing immediate funds for the purchase can be a challenge. Forget about the banks extending the business overdraft or providing other forms of credit for a horse purchase!

So...the future owner ponders…what about buying the horse out of my "cashed-up" Super Fund (SMSF) and having the racehorse as one of its assets? Well, I'm afraid this won't fly with the ATO given the tightening of standards that apply from 1 July 2011 to "collectables" or "personal use assets" that are acquired by a Self-Managed Superannuation Fund (SMSF).

"Collectables" includes items such as:

Assets of a particular kind, if assets of that kind are ordinarily used or kept mainly for "personal use or enjoyment". The latter category includes racehorses owned by a SMSF, given that the ATO has long classified them as "personal use assets".

Borrowing from the fund to buy a horse?

If the fund can't invest directly into racehorses, thought often turns to borrowing from the fund to buy the horse. Thus, the direct ownership of the asset is not held by the fund, instead it could be a fund member or an entity related to that member that borrows from the fund for this purpose.

This is where many advisers get the advice on SMSF borrowing seriously wrong!


Borrowing by a member or relative is prohibited

Under the Super Fund law, yes, prima facie a fund can lend up to 5 per cent of the value of its assets to fund members or the members relatives. This rule reflects that excessive loans to members or their relatives is a breach of what is known as the "in-house assets" rule and the ATO strictly forbids this.

However, what is not well known and often overlooked, is this " 5 per cent" rule is overridden by another area of Super Fund law which strictly prohibits the fund providing any form of lending or giving "financial assistance" to members or relatives.

In plain English, the fund can neve r lend to a member or relative, regardless if it is less than 5 per cent of the value of the fund's assets.

But the good news is that there is an exception to this overriding "financial assistance" limitation – a fund can lend to a related party who is not a member or relative of a member of an SMSF. Thus, a SMSF can lend up to 5 per cent of the total value of its assets to a related entity such as a related company or a related unit trust .

In another anomaly of the SMSF borrowing rules, it can also lend an unlimited amount to a member's cousin or their former spouse (if both not fund members), given that they are not considered related parties – they are outside the definition of a "relative" under the general definition contained in the Super laws.

What does this all mean?

The upshot of the above is that if you want to fund the purchase of a racehorse by borrowing from your SMSF:

you can't lend to any member or relative of the fund (e,g. yourself, wife, children, Mum and Dad); and
you can lend up to 5 per cent of the total value of the fund assets to a related entity such as a company or trust.

Note – where you lend to any party from your SMSF, that borrowing must be on a commercial footing and an appropriate market rate of interest should be charged, i.e. an SMSF trustee must ensure all of its investments are made on an arm's length basis.

Please don't hesitate to contact the writer if you wish for me to clarify or expand on any of the matters raised in this article.

Prepared by:

PAUL CARRAZZO CA
CARRAZZO CONSULTING, CHARTERED ACCOUNTANTS
801 Glenferrie Road, Hawthorn, VIC, 3122
TEL: (03) 9982 1000
FAX: (03) 9329 8355
MOB: 0417 549 347
E-mail: paul.carrazzo@carrazzo.com.au
Web: www.carrazzo.com.au