Can your SMSF borrow?

The technical answer is no, however, since 2007 they are allowed to enter into limited recourse borrowing arrangements.

If done right, and if you considered your investment strategy, the risks that come with borrowing, the sole purpose of your fund, then they can really help you get ahead.

You should always start with reading your deed and considering what you are trying to achieve. Just because your friend or family member thinks this is a great idea, it may not be right for you as your situation and goals might be completely different.

What are the key aspects of limited recourse borrowings?

The borrowing must be used to acquire single acquirable asset.

The rules are complex, and one must thread carefully. Whilst a building spreading over two titles is generally OK, farm property that spreads over several titles is not.

The asset must be one that the SMSF is permitted to hold directly.

The property is held on trust. 

This trust is sometimes called bare trust, holding trust or security trust and the SMSF has a beneficial interest and a right to acquire the legal ownership of the property through the payment of instalments (by repaying the loan).

This is a special kind of trust and any existing family trust you may have is not suitable.

Each single acquirable asset must be held in a different bare trust.

The lender’s recourse against the SMSF in the event of default of the borrowing is limited to rights relating to the asset at the time of the action.

This means that the bank or other lenders cannot touch other SMSF assets, should SMSF not be able to repay the loan.

Fund cannot borrow to improve the asset!

If your SMSF is purchasing an asset that needs improvements (rather than few repairs), you need to ensure that you have enough cash to fund these, and that the improvements in fact do not change the character of the asset.

Keep in mind, that the government can change the legislation at any stage.

For all your tax and SMSF needs, call your Brisbane accountants on 07 3160 7386.

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