About limited recourse borrowing arrangements
Borrowing money for your SMSF is allowed in limited circumstances. One of these exceptions is for limited recourse borrowing arrangements (LRBA).
An LRBA is an arrangement where the:
- SMSF trustee obtains a loan that is used to purchase an acquirable asset
- asset is held in a separate trust from the SMSF, known as a holding trust
- SMSF acquires beneficial interest in the asset and after repaying the loan has the right to legal ownership of the asset
- other assets of the SMSF are protected if the loan defaults.
While the asset is not held directly by the SMSF, any investment returns earned from the asset go to the SMSF.
Holding trusts
While superannuation law doesn't specify the type of trust that must be used as a holding trust, you must ensure that the SMSF trustee has:
- a beneficial interest in the asset being held in the holding trust
- the right to acquire legal ownership of the asset after making one or more payments.
Special in-house asset rules apply if the asset is the only asset owned by the holding trust.
Complex trust structures are unlikely to meet the requirement that the SMSF trustee has the necessary interest in a particular asset of the holding trust. For example, a discretionary trust could not be used. Also, the holding trust cannot be one in which the SMSF trustee is one of a number of unit holders in a unit trust.
Before entering an LRBA
Before entering an LRBA, we recommend that you seek advice from a qualified, licensed professional to help you decide if it's right for your SMSF. Don't decide until you understand how the investment works.
What you need to consider to borrow under an LRBA
To borrow under an LRBA, trustees must ensure it:
- meets the requirements of super laws (different rules apply depending on when the LRBA was entered)
- meets the rules for assets under the LRBA
- is consistent with the fund's investment strategy
- meets the governing rules outlined in your trust deed.
You should also consider:
- who the lender will be and if you have a relationship with the lender
- if the loan can be called in early
- what happens if borrowing rates reduce or increase
- if the lender can sell the loan to a different lender
- if the terms of the loan can be altered
- if the asset being offered is good quality and the value of the asset
- fees and costs
- if you must pay a commission
- insurance and maintenance costs.
SMSF specific advice
You can apply for self-managed super fund specific advice to find out how super law applies to your specific circumstances.