Borrowing In A Self-Managed Super Fund (SMSF) Guide

There have been restrictions on borrowing in a super fund in previous years, yet the laws became a lot more relaxed in 2007 that now allow super funds to use limited recourse borrowing arrangements to borrow to buy investment assets such as property.

Can I borrow in a Self-Managed Super Fund (SMSF)?

Yes, under the correct structure the trustee of an SMSF can undertake ‘limited recourse borrowing arrangements’  (also referred to as LRBA's) which are often incorrectly termed instalment warrants because prior to 2007 this was the only financial product that would allow borrowing inside super.

Limited recourse borrowing means that you can borrow money in your super fund as long as the lender uses only the asset purchased as security. i.e. the lender’s recourse is limited only to the purchased asset, it cannot take any other assets if your super fund were to default on loan payments. This condition is in addition to a few others shown in the ATO extract below.

“An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies each of the following conditions:

  • the borrowed monies are used to acquire a single asset, or a collection of identical assets that have the same market value (that are together treated as a single asset), which the fund is not otherwise prohibited from acquiring (called the ‘acquirable asset’). The new law makes it explicit that borrowed money applied to expenses incurred in connection with the borrowing or acquisition (such as loan establishment costs or stamp duty), or expenses incurred in maintaining or repairing the acquirable asset, is allowed
  • the borrowed monies are not applied to improving an acquirable asset
  • the acquirable asset is held on trust (the holding trust) so that the SMSF trustee receives a beneficial interest in the asset
  • the SMSF trustee has the right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest
  • any recourse that the lender or any other person has under the arrangement against the SMSF trustee is limited to rights relating to the acquirable asset. This limitation applies to rights directly or indirectly relating to a default on the borrowing and related charges or directly or indirectly relating to the SMSF trustee's rights in respect of the acquirable asset (for example, rights to income from the asset)
  • the acquirable asset is not subject to a charge other than as provided in relation to the borrowing by the SMSF trustee
  • the acquirable asset can be replaced by another acquirable asset that the SMSF is not otherwise prohibited from acquiring, but only in very limited circumstances as listed in the super law.”[1]

References

[1] Limited recourse borrowing arrangements by self-managed super funds - questions and answers, ATO, 2011

[2] ATO Interpretative Decision 2007/56, ATO

    Can I draw down a loan and invest into new assets?

    Yes. Each drawdown constitutes a new borrowing and can be done so long as the conditions above are met. However you are not allowed to re-draw against the equity of an existing asset as this would breach the superannuation rules. For example you cannot use a property in your super fund as security to borrow further funds to acquire another property. The SMSF needs to have a separate deposit such as cash to secure another asset.

    Can I capitalise the interest on borrowed money in an SMSF?

    Yes. You can apply borrowed money towards expenses incurred in connection with the borrowing. However you cannot borrow money to construct a building on vacant land or use it to make improvements such as renovations (this would create a new asset). There are a number of guidelines on the ATO website that discuss what a renovation is versus maintenance or repairs.

    Can I buy CFDs in an SMSF?

    Borrowing rules also allow your super fund to buy CFDs – one of the most controversial and risky financial products available to retail investors! From the ATO in relation to CFDs:

    “Issue: Has a trustee of a self managed superannuation fund (SMSF) contravened the Superannuation Industry (Supervision) Act 1993 (SISA) by investing in CFDs? Decision No. The trustee of an SMSF has not contravened the SISA by investing in CFDs where they have not deposited fund assets with the CFD provider.”[2]

    This means that the fund assets are not held as security to make the CFD transaction. The risk of the CFD can only be limited to funds deposited with the CFD provider. You will need to check the fine print with the institution you are dealing with to ensure they have no security over any of the SMSF's assets.

    What is the maximum amount I can borrow with my super?

    Lenders generally impose a maximum Loan to Value Ratio (LVR) for borrowers as they are not legally allowed to have recourse over any of the super fund’s other assets. Depending on your superannuation structure banks will lend anywhere up to 80% of the asset value determined by the type of asset being purchased, your level of super contributions, rental income and other variables. For example a residential investment property can have a LVR of up to 80% if certain conditions are met with some lending institutions and banks. Speak to one of our advisers or brokers who understand the banks requirements here.

    Individual or corporate trustee?

    In relation to a limited recourse borrowing arrangement (LRBA) for property investment, different lenders have varying requirements. Many of the larger banks and institutions typically require a corporate trustee. This is not a legal requirement to qualify for a LRBA. However many banks have lending policies that favour having a corporate trustee.

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    This article was provided by Greg Suefong, Principle Consultant, Strategic Wealth Alliance

     

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