SMSF Borrowing under the LRBA: Here’s What to Know

The latest trend in the SMSF world is the ability for SMSF trustee’s to borrow money to investment.  This ability to borrow money using your SMSF to finance investments including direct property is possible under the Limited Recourse Buying Arrangement (LRBA).  According to the Australian Taxation Office (ATO) the LRBA requires that an SMSF trustee take out a loan from a third party lender which can then be used to purchase a single asset such as a residential or commercial property, which is to be held in a separate trust. Many SMSF holders are considering this as an option to invest in property, however there are very strict borrowing conditions that should be taken into consideration before taking the plunge.

Before committing you should assess whether or not this is the right kind of investment for your SMSF by taking into account the risk, the underlying investment and whether or not the SMSF is adequately diversified to meet long-term investment objective.  Furthermore, check to see if the asset being offered is of good quality and consider all fees and costs associated.  Taking out a loan under the LRBA can be costly and you need to evaluate if your SMSF will be able to withstand these costs considering it is a long term investment and there may be further costs involved such as commissions.

If you currently do not have an SMSF and are considering setting one up for yourself to take advantage of the LRBA you should first consult your financial adviser to see if an SMSF is the right fit for you.  An SMSF can be suitable for someone who has a wide range of knowledge in financial and legal matters, and one who also has an extensive amount of super to be able to contribute to their fund.

Lastly, if you are seriously considering borrowing money through the LRBA, be sure that the arrangement satisfies the requirements stated under the super law.  Below is a list of requirements from the ATO’s website which outlines the 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

After you have better understood the conditions associated and the potential risks consider speaking to your financial adviser to see if this is the right option for you.

We have had many requests from potential clients to assist with the establishment of a SMSF arrangement because they wish to acquire property. The ATO notes a minimum amount held in Superannuation of $200,000 before you should consider establishing a SMSF arrangement. Remember the cost of a tax return and audit can be as much as $3,250 every year.

We would urge people thinking of establishing a Self-Managed Superannuation arrangement to consider a wide range of costs. Not just the cost of the return and audit but also potentailly higher interest costs (Banks charge customers more when they borrow via a Self-Managed Superannuation arrangement) and other ongoing costs including insurance etc.

Smaller funds can end up funding ongoing costs which are significant when compared with regular superannuation arrangements.

LifeTime Financial Group are specialist (holding appropriate accreditations) advisors who are ideally positioned to assist you. Anthony Stedman and Adam Watts both hold specialist accreditations with SPAA as specialist Self-Managed Superannuation planners.

Would you like to discuss your personal position further with one of our highly qualified financial planners? Why not call us today on 03 9596-7733. There is no cost or obligation for our initial conversation/meeting.

Written by Anthony Stedman of LifeTime Financial Group. A leading privately owned Melbourne based Financial Planning practice.

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