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Promissory notes a powerful SMSF tool

The use of promissory notes can provide greater flexibility when employing a gearing strategy within an SMSF, according to an expert servicing the sector.

In particular, this type of financial instrument could assist with a technical restriction governing limited recourse borrowing arrangements (LRBA) involving related-party loans, SMSF Strategies principal Grant Abbott told delegates at the SMSF Strategies Day in Melbourne on Friday.

“One of the problems with limited recourse borrowing arrangements is that in order to meet the conditions of section 67A of the SIS (Superannuation Industry (Supervision)) Act is you have to actually borrow money to acquire the asset you want in the super fund,” Abbott said.

Specifically, Abbott was referring to situations where an SMSF member wanted to make an in specie transfer of an asset, such as a property, from outside of the fund to inside the fund.

“For example, if you wanted to transfer business real property into the holding trust under an LRBA, you can’t do so without actually borrowing money because it would be deemed that you’re actually loaning the property rather than money,” he said.

“So how you would do it is rather than actually loaning physical dollars to the fund, you would issue the SMSF with a promissory note instead.

“You would then use that promissory note as the basis of the loan to acquire the property that is currently sitting outside the fund to absorb it into the find.”

He said promissory notes were one of the best financial instruments an SMSF could use.

“That’s because the Australian Taxation Office considers them as cash,” he said.

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