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Borrowing in SMSF

Self Managed Super Fund Loans

Are you looking to boost your superannuation by venturing into property investments but lack sufficient savings within your super? If you have a self-managed super fund (SMSF), exploring the option of borrowing money to invest in property might be a viable solution. SMSF property loans offer numerous benefits, primarily tax incentives, and the opportunity to leverage rental income as additional cash flow, enhancing your investment prospects.

iCare Super is here to assist you with your SMSF borrowing needs, unlocking a new realm of investment opportunities. Connect with one of our specialists in self-managed super fund loans today.

How Does SMSF Borrowing Work?

An SMSF can secure funds from various sources to acquire properties or other assets:

  1. Banks and Lenders: While most major banks in Australia no longer offer SMSF loan products, there are still 1-2 banks and smaller lenders actively engaged in limited recourse SMSF borrowing. As your SMSF mortgage broker, we conduct thorough research, comparing rates and fees to find SMSF property loans that align with your specific needs.
  2. Related Parties: Members of the SMSF or their relatives can lend to the SMSF, with the SMSF paying interest to these related parties. This can involve drawing equity from a home loan or utilizing other available funds.
  3. Unrelated Parties: Any unrelated parties can also lend to the SMSF.

Legislation does not impose restrictions on who can lend to the SMSF, leaving it to the trustees to determine how to finance property or other asset purchases within the SMSF.

Requirements for the SMSF Loan to be Compliant

SMSF trustees must ensure that the borrowing structure adheres to the Superannuation Industry (Supervision) Act (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 must be set up correctly, and the trustee for the bare trust must be the registered owner of the property or other assets.
  3. A formal commercial loan agreement is necessary if the SMSF borrowing is from a related party.

Concerns from ATO

It’s crucial to be aware of the Australian Taxation Office’s (ATO) concerns regarding SMSF borrowing:

  1. The sole purpose test may fail if all members are in pension phases.
  2. Borrowing for the construction, development, or refurbishment of a property within the SMSF is not permitted.
  3. The interest rate for borrowing from related parties must be on a commercial basis.
  4. The asset to be purchased must be allowed by the law.

Limited Recourse Borrowing Arrangements – Questions and Answers

What is limited recourse borrowing?

A limited recourse SMSF borrowing arrangement involves the SMSF trustee taking out a loan from a lender. The loaned funds are then used to purchase a single asset or a collection of identical assets held in a 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. You only can buy one property in one bare trust. However, the bare trustee trustee can be the same for multiple bare trusts. If you set up a corporate trustee for the the bare trust, this company can be used as the trustee for multiple bare trusts for your SMSF.

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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