Self-managed super fund (SMSF) trustees should seek advice when considering using gearing within their retirement savings vehicles even though it is not compulsory to do so, according to Cavendish Superannuation head of technical services Tim Miller.
"The general review of limited recourse borrowing arrangements is that they are not derivatives and they are not instalment warrants so there is no requirement to receive advice on these products," Miller said.
"But you go to the banks and most of them will say can we see the advice you received to show you understand what it is you are entering into. So it's still a worthwhile process getting some level of professional advice on the structure of these investments because some of the banks will require it," he added.
In addition to receiving advice before entering into a limited recourse borrowing arrangement taking out appropriate insurance was another important step in the process Miller said.
This is a prudent move even though the asset cannot necessarily be replaced using the proceeds of borrowings with the exception of assets ruined in the recent spate of natural disasters across the nation, he said.
"Having that insurance within the superannuation fund to some degree will remove the guarantee issues or trustees risking assets outside of the SMSF to pay the debt off in the event there is a disaster, Miller explained.
"So I think it's prudent to have insurance for disaster purposes but also in the event of a member's death and other issues like that where the liability will still have to be settled."
