SMSFs and Borrowing

SMSFs have been able to borrow, indirectly, since September 2007, subject to very strict conditions. You can gear an investment or purchase property using what is known as a Limited Recourse Borrowing Arrangement (LRBA).

This is just a fancy name to indicate that the lender can only establish a claim over the asset being acquired, ie. the lender can’t touch other super fund assets, should the borrower default. Another strict requirement is that the asset being purchased must be held in trust by another entity, until the last loan repayment is made by the super fund and then ownership must be able to be transferred to the super fund. This other entity is commonly known as a Bare Trust and usually requires its own corporate trustee. Other limitations are that the funds borrowed must be used to purchase a ‘single acquirable asset’ (usually property) and those funds cannot be used to develop or improve the asset acquired.

Whilst the asset is held in trust through the course of the loan, it is the super fund that collects rent, pays expenses and does all the reporting. The trustee of the bare trust is virtually invisible to the ATO and does not need an ABN, TFN or GST registration. As any of your super fund’s income can be used to repay the loan, discharging the loan can be fast tracked by using concessional contributions, rent, dividend income and so on.

LRBAs are a great way to increase the rate of wealth accumulation in your super fund as the loan does not come under any contribution cap limits. Remember, you are now paying rent to your super fund where income is taxed at only 15%.

Be sure though, to get professional advice right from the early stages of planning to implement such a strategy. Correct documentation, its timing and the source of all funds (especially that initial deposit) are critical to ensure a good outcome for you at the end of the day.

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