SMSF Borrowing

 

Confused about your investment options? Let’s make things simple.

How does SMSF borrowing work?

The relaxing of rules around self-managed superannuation funds, or SMSFs, mean that you can now borrow to invest in some circumstances. A new legislative instrument registered in May 2020 has made it even easier for SMSFs to acquire property. You can do this via a limited recourse borrowing arrangement using a holding trust. It’s another way of adding a real property asset to your fund.

How does a limited recourse borrowing arrangement relate to SMSFs? 

Put simply, a limited recourse borrowing arrangement, or LRBA, is where a superannuation fund borrows to purchase a single investment (asset), such as a property or a parcel of identical shares. The superannuation fund is required to set up a holding trust which will have legal ownership of the asset that is held on trust for the fund. As an SMSF trustee, you will receive the beneficial interest in the purchased asset and have the right to acquire the legal ownership of the asset after making one or more payments.

What’s important to understand is that if you, the SMSF trustee, default on the loan, the lender’s rights will be limited to the asset held in the holding trust only. This means there is no recourse to the other assets held in your SMSF.

So, what’s in it for you?

Well, there are lots of advantages to borrowing within your SMSF. Let’s take a look.

  • The purpose of superannuation is to provide you with an income in your retirement and smart investment strategies in conjunction with a LRBA can improve your SMSF’s returns over time. So, SMSFs offer the potential for increased returns for your investment.
  • You also have the opportunity to transfer business premises into your SMSF. If you are a small or medium-sized business owner, this is a particularly attractive option. In effect, this allows you to take control of your Super, invest in your business premises and make your fund work smarter – not harder – for you. It’s certainly a compelling proposition – your property earning a market rate rent with potentially concessional tax benefits. But as always there are risks, so be sure to talk with us – we are here to guide you every step of the way. 
  • Having a well-diversified portfolio can reduce your risk and improve your returns over time. We would be happy to advise you on how to use a LRBA to diversify your SMSF.
  • As a general rule, interest and other borrowing expenses are tax deductible to your SMSF. This can reduce any tax payable within your fund.

These decisions don’t have to be stressful or even complicated. Take the first step and talk to us today.

SMSF Borrowing and Limited recourse borrowing arrangements

SMSF Business Real Property