Grant Abbott, superannuation consultant with Abbott & Mourly Lawyers, said offset accounts linked to SMSF loans can provide substantial financial benefits through interest savings, provided they are structured correctly and the loan documentation allows.
“Section 67A of the Superannuation Industry Supervision (SIS) Act 1993 permits trustees to borrow under specific conditions known as a limited recourse borrowing arrangement (LRBA),” he said.
“In an LRBA, a separate bare trust holds the SMSF property or other assets. If the trustee defaults on the loan, the lender’s recourse is limited to the asset held in the bare trust, thus safeguarding the remaining assets of the SMSF.”
He said there are several pitfalls regarding SMSFs using redraw facilities and although they can help reduce interest payments, they are problematic under SMSF regulations.
“They release equity the SMSF trustee has built up in the fund asset and as such section 67 of the SIS Act restricts the release or use of equity from SMSF properties, making redraw facilities non-compliant when linked to SMSF loans,” Abbott said.
“However, unlike redraw facilities, offset accounts are compliant and beneficial for SMSFs. An offset account reduces the loan balance for interest calculation without decreasing the loan principal.”
For example, he said, if a $100,000 loan has $10,000 in an offset account, interest is calculated on $90,000, not $100,000. The money in the offset sits in the bare trust and is not part of the fund’s assets.
“Another example is if the trustee of an SMSF has a property loan of $300,000 with a linked offset account containing $50,000. Interest is only calculated on $250,000, leading to significant savings without affecting the loan’s principal, maintaining compliance with SMSF regulations,” he said.
“In contrast, using a redraw facility, if a trustee initially borrows $300,000 and repays $50,000 over time, reducing the balance to $250,000 and then redraws $20,000 for emergency expenses, the loan balance returns to $270,000. This act of redrawing contravenes SMSF rules as it is considered releasing equity, which is prohibited under LRBA provisions.”
He continued that in the current high interest environment, maintaining liquidity and cash reserves is vital yet often unproductive. An offset account allows SMSF trustees to hold necessary cash while effectively earning an interest rate equivalent to the mortgage rate, significantly enhancing cash flow.
“Additionally, the interest savings are not considered taxable income, providing a tax-efficient strategy for managing SMSF finances,” he said.
“It’s advisable for trustees to regularly review their SMSF loan structures, especially if they include features like offset accounts or redraw facilities. Non-compliance can lead to significant penalties and the loss of tax benefits.”
