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Borrowing to pay SMSF Pension Payments

Q: I run a single member SMSF. I am 70, retired and my entire members balance is an Account Based Pension. 99% of my assets are in a Term Deposit and the small amount left over is in a bank account. Each year in June my Term Deposit expires and I withdraw my minimum pension amount. I then rollover the previous Term Deposit amount minus my minimum SMSF pension payments into another 12 month Term Deposit. I repeat this year after year.

It’s mid-June and I recently rolled over the Term Deposit again for another 12 months but forgot to withdraw my minimum SMSF pension payments. I start to panic as I am aware that not meeting my minimum may have serious consequences and could jeopardise the tax exemption for the entire year.  I quickly call up the bank and ask if they can terminate the Term Deposit but they require 31 days’ notice before they can dismiss it.

 

WHAT CAN I DO?

A:  We are well aware that you do not want to lose your tax exemption and we are not going to go down the common path and record the pension as a ‘sundry creditor’ as it doesn’t sit well with the ATO, so……….

Why not borrow the money to pay the minimum SMSF pension payments?

Q: BORROW??

A: Under Section 67(2) of the SIS Act, it states that there is nothing to prohibit a trustee of the Super Fund to borrow money if it is to make a payment to a beneficiary which the trustee is required to make by law or by the governing rules, providing the borrowing doesn’t exceed 90 days and the total amount borrowed doesn’t exceed 10% of the value of the assets held by the fund.

I would recommend you do the following:

  • Calculate the minimum pension amount you would need to withdraw in order to keep your tax exemption
  • Set up a Loan agreement between the Super Fund and the lender (make sure interest is built into the agreement). The lender can be whoever is willing to lend you the money
  • Lender deposits the money into the Super Funds bank account
  • Withdraw that exact amount from the Bank Account before 30 June
  • When the Term Deposit is terminated, pay back the amount borrowed plus interest. Make sure this is prior to 90 days from the time deposited into the funds bank account

Summary: This is a fantastic little magic trick you can keep up your sleeve to use in a situation where your client’s don’t meet their minimum SMSF pension payments.  Your clients will think you’re a genius and fingers crossed will refer your business!!

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