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Borrowing in SMSF

Self Managed Super Fund Loans

Looking to grow your super by investing in property, but don’t have enough super saved at the moment? If you have a self managed super fund, borrowing money to invest in property might be an option to consider. There are numerous benefits to taking out SMSF property loans – mostly tax incentives, but also the ability to use rental income as additional cash flow to further increase your investment opportunities.

iCare Super can assist you with your SMSF borrowing needs and open up a new world of investment opportunities. Speak to one of our specialists in self managed super fund loans today.

How Does SMSF Borrowing Work?

A SMSF can borrow from the following sources to purchase properties or other assets:

  1. Most banks in Australia like Commonwealth Bank, NAB, Westpac, ANZ, Macquarie, St George, Bankwest and some credit unions are actively involved in SMSF borrowing on limited recourse basis. If you do enough research and compare the rates and fees, you should be able to find a number of SMSF property loans that best suit your needs.
  2. Any related parties, like a member of the SMSF or relatives of the member, can lend to the SMSF. The SMSF pays interest to the related parties. Therefore you can lend to your SMSF by drawing the equity in your home loan or other available funds.
  3. Any unrelated parties can lend to the SMSF.

The legislation does not prohibit on who can lend to the SMSF, so it is really up to the trustees to decide how to finance the purchase of the property or the other assets in the SMSF.

Requirements for the SMSF Loan to be Compliant

All self managed super fund loans must comply with the regulations set by ASIC. The SMSF trustees need to ensure the borrowing structure is compliant by taking into consideration SISA and other tax rules:

  1. The loan must be a limited recourse loan between the lender and the SMSF.
  2. A custodian/bare trust with a corporate trustee has to be set up correctly. The corporate trustee for the bare trust must be the registered owner of the property or other assets.
  3. A commercial loan agreement need to be formally executed if the SMSF borrowing is from a related party.

Concerns from ATO

The ATO’s concern about the self managed super fund borrowing should be noted:

  1. Sole purpose test may fail if all members are in pension phases.
  2. If the fund borrows to construct, develop or refurbish the property, this is not allowed in this SMSF borrowing arrangement.
  3. The interest rate can’t be on a commercial basis for the borrowing from related parties.
  4. The asset to be purchased needs to be allowed by the law

Limited Recourse Borrowing Arrangements – Questions and Answers

What is limited recourse borrowing?

A limited recourse SMSF borrowing arrangement requires an SMSF trustee to take out a loan from a third party lender. The trustee then uses the loaned funds to purchase a single asset (or collection of identical assets that have the same market value) to be held in a separate trust.

Any investment returns earned from the asset go to the SMSF trustee.

If the loan defaults, the lender’s rights are limited to the asset held in the separate trust.

Does interest on a borrowing from a related party need to be at commercial rates?

A trustee of an SMSF or its investment manager must ensure that all investments are conducted on an arm’s length basis or, if the parties are not at arm’s length, that the terms of the investment are no more favourable to the other party than they would be if the parties were dealing at arm’s length.

Can a related party borrow on a full recourse basis and on-lend the money to the SMSF under a limited recourse borrowing arrangement at a higher rate of interest?

Yes, but proper documentation and an arm’s length rate of interest is required for this type of self managed super fund borrowing.

Does an arrangement that permits capitalisation of interest or other borrowing charges satisfy the super laws?

Yes. The super law (specifically, subparagraph 67A(1)(a)(i) of the SISA) applying to these arrangements explicitly provides that, under a limited recourse borrowing arrangement, the SMSF trustee can apply borrowed money towards expenses incurred in connection with the borrowing.

Can an SMSF member provide a personal guarantee to the lender in a limited recourse borrowing arrangement?

Yes. The recourse of the lender against the SMSF trustees in the event of a default on the SMSF borrowing must be limited to the asset that is being acquired under the arrangement. A third party may put up their own assets as a guarantee to provide additional security to the lender for SMSF property loans.

Can an SMSF trustee acquire more than one real property title under a single limited recourse borrowing arrangement?

Multiple real property titles cannot generally be acquired under a single limited recourse borrowing arrangement.

Can an SMSF trustee borrow under a limited recourse borrowing arrangement to build a house on vacant land owned by the fund?

No. An existing SMSF asset cannot be put into a limited recourse borrowing arrangement. The giving of a charge over an existing asset of the fund (the vacant land), as would generally occur under such arrangements, would contravene the super law.

Learn More Today

If you’d like to find out more about self managed super fund borrowing or you want to weigh up your options when it comes to self managed super fund loans, make an appointment with iCare Super today. Call us on (03) 9557 4079 or contact us online.

Further reading – ATO Publications on SMSF Borrowing

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