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SMSF – Your questions answered, day seven – how can I invest within my SMSF?

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Once upon a time, I thought it was illegal to borrow to buy shares or property inside an SMSF but now I see ads for doing exactly that. How can this be done?

There has always been a way to get some leverage into an SMSF and that’s by buying units in a managed fund, which many SMSF members do, but there are funds that use gearing to turbo-charge their returns.

Of course, these funds can also see their losses magnified, and so prudent fund managers don’t over-expose their fund to these sorts of funds. They need to time the market to get the best results, which can be volatile.

By the way, some of these funds are called hedge funds. In contrast, you can borrow to buy shares or property directly, but this is not as easy as it sounds. Superannuation is highly regulated and you will need to ensure the borrowing and the assets you intend to buy are allowed in your fund, whether it’s a SMSF or a Master Trust Super Fund offered to you by your financial adviser.

With a SMSF, as you are the trustee, it’s your responsibility to know what can and cannot be done. The super rules allow you to borrow so long as the loan is only secured by the asset used to purchase the loan. The loan cannot be secured by you personally or by other assets. This means that this type of borrowing is more complicated than your usual borrowing arrangements.

As a result, to buy shares or property directly you need to buy the asset and the loan all packaged up. When buying anything as a package, you need to do your research to carefully determine what you are getting yourself into – after all, this is your retirement you are playing with, and could spell the difference between continuing to work to age 70 versus going overseas each year and not working from age 55 or 60.

On buying property, it is not as simple as having your loan arranged, going to an auction and dumping the property in your SMSF. I would recommend some pretty extensive research and/or get some advice but make sure it is not from the person flogging the property or shares.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Thursday, December 30, 2010

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