Why immediate super hits are out

Q. I am 53 and operate a SMSF with my wife. I am currently paying about 7 per cent to Commonwealth Bank in interest on a loan, which just happens to be against either vacant land or my residence. I am told my SMSF cannot replace the bank. Why not? If the bank feels it's got enough grounds to cover its loan, why can't my SMSF assume the same financial position? If the SMSF holds a mortgage over the title it would be protected and not lose its money. I'm told my SMSF can't buy my house, but I'm not asking it to I just want it to take over the loan.

A. The sole purpose of superannuation is retirement. As a result, anything that gives a superannuation member an immediate benefit, such as a loan benefit, is banned. This is also the reason why super funds are unable to buy assets from members, apart from business real property or investments that are publicly traded.

There were excesses before this rule became law. Instead of looking for the few bad apples the government banned the practice for everyone.

The rule was also introduced to protect a member's superannuation from attack during financial difficulties. During the recession we had to have, and before the ban on lending to members became law, superannuation funds could provide finance to a member's businesses in the form of leases. But some super funds suffered huge losses after they stopped receiving the lease income and ended up with assets that were worthless.

While members were banned from borrowing, an exception was introduced 12 months ago: super funds are able to borrow to purchase an investment property. There are very strict conditions and it must be done through a non-recourse loan facility.

Questions can be emailed to max@taxbiz.com.au

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