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Can a SMSF Borrow Money?

By TW Business & Accounting Services

smsf accountants gold coast

A self-managed super fund (SMSF) can indeed borrow money. However, it can only be done under certain circumstances. Following the modification of the rules in 2007, SMSFs can select from various investment opportunities that did not exist previously.

While self-managed super funds typically cannot lend money, they may borrow money to buy assets, including shares and managed funds. SMSF borrowing for property is also allowed by Australian law. 

Under SMSF borrowing rules, a share must be a single acquirable asset. A group of identical shares that have the same market value and are purchased simultaneously by a single company is an example of a single acquirable asset. 

The particular circumstances where a self-managed super fund can borrow money include:

  • Borrowing 10 percent of the fund’s entire assets for 90 days.
  • Borrowing money is also allowed to complete security transactions in seven days. However, borrowing funds can only proceed if the likelihood of borrowing wasn’t anticipated at the time of the transaction.
  • Borrowing through instalment warrants or limited recourse breaking agreements (LRBAs).

To learn about TW Accounting’s SMSF services, visit our SMSF accountants Gold Coast page.

How much can an SMSF borrow to buy property?

A self-managed super fund trustee can borrow at least $100,000 depending on the fund’s borrowing capacity and the lender’s approval. Some lenders offer loans of up to $4,000,000. 

Lenders also consider a property’s loan-to-value ratio (LVR) when loaning money to an SMSF. An LVR is the ratio of the actual money borrowed to the property’s value. A higher deposit translates to a lower LVR which, in turn, reduces the lender’s risk. The maximum LVR for SMSF limited recourse borrowing may vary based on the lender. 

Some lenders provide up to 80 percent LVR loans for some properties. In this situation, the lender can offer up to 80 percent of the investment property’s worth and require the trustee to pay the outstanding amount through his self-managed super fund.

What is LRBA?

A trustee may borrow funds under an SMSF Limited Recourse Borrowing Arrangement (LRBA) to purchase an asset. The lender is typically a bank or a mortgage provider. 

In some instances, a trustee can borrow funds from a related party, such as relatives and business partners of each self-managed super fund member. These business partners’ spouses, sons, and daughters are also considered related parties. A trustee can borrow money from any business an SMSF member or his associates own or influence. 

SMSF limited recourse borrowing allows a lender to grant a loan to an SMSF trustee. The latter, in turn, uses the funds to buy a single acquirable asset (or a group of assets having the same market value). 

The trustee must hold the asset in a separate holding (bare) trust. Any investment returns from the asset increase in value of the self-managed super fund. The SMSF must also cover costs associated with the asset. 

An SMSF trustee can incur expenses (loan establishment fees, for example) related to borrowing and acquiring an asset. Funds acquired via SMSF limited recourse borrowing can cover those expenses. 

The lender can reclaim one asset and avoid losing money on the other assets if the self-managed super fund trustee defaults on the loan for whatever reason. It guarantees that the super fund’s assets remain untouched and that it continues providing retirement benefits to its trustees.  

Different LRBAs are needed for shares purchased at various times or from different businesses. 

SMSF limited recourse borrowing prohibits the retention of shares distributed through a dividend reinvestment plan for the portion of shares obtained under a single LRBA. 

A self-managed super fund can also use an LRBA to invest in exchange-traded options rather than shares. However, if the option were converted to shares, the asset’s nature would change. Consequently, the trustee must cease borrowing funds to invest in exchange-traded options.

The rules of borrowing under LRBA

SMSF members alone are accountable for their self-managed super fund. Their retirement benefits are paid out of the fund. They must follow Australian laws so their fund can provide tax benefits. Otherwise, their fund may be disqualified and pay thousands of dollars in fines. 

Borrowing funds from a self-managed super fund offers several unique advantages. First, it allows SMSF members to diversify their investments. Plus, SMSF limited recourse borrowing also yields tax advantages on interest.  

Here are the SMSF borrowing rules: 

  1. The transaction must follow your self-managed super fund’s investment plan to pass the “Sole Purpose Test.” 
  2. Australian law allows SMSF borrowing for assets such as property or shares. Purchasing an individual or a group of assets with the same market worth is acceptable. 
  3. The property can be preserved or repaired. Australian law forbids SMSF borrowing if members will use the funds to alter the structure of a property. 
  4. SMSF members should not utilise the borrowed funds to improve the assets they wish to purchase. 
  5. The asset must be held in trust until the debt has been paid off. The SMSF trustee can become the asset’s legal owner once the debt repayment is complete. 
  6. The funds cannot be utilised for personal gains, such as financially helping SMSF members, their family members, or friends. 
  7. An asset can replace another one as mandated in the super law. 

If you’re looking set up a SMSF account or need professional advice regarding the management of your existing SMSF, get in touch with the team at TW Accounting. Professional Gold Coast small business accountants.