Self Managed Super Funds (SMSF) are allowed to borrow to invest in direct property, managed funds or shares as long as a Limited Recourse Borrowing Arrangement is used for the transaction.
An LRBA is a financial arrangement which enables an SMSF to purchase property or shares with borrowed money. It is limited recourse because if the trustee defaults on the loan, the lender’s recourse is generally limited to the asset acquired which protects the value of the other assets of the fund.
Trustees are able to borrow from related parties of the fund including its members or from lending institutions. If borrowing from a related party specific rules need to be followed to ensure the loan is on commercial terms.
Since an SMSF cannot own an asset directly that is geared, the asset must be held on trust until the loan is repaid. A bare trust is established to hold the asset as custodian but the SMSF has full beneficial interest in that property or shares, and as a result will receive all rent paid by the tenants or dividends generated by the shares. Your SMSF trustee pays interest on the loan and fees to the lender. In the case of a property it also pays for repairs, maintenance and property management expenses. These costs may be deductible to the fund.
One of the main attractions of borrowing to purchase shares or property within an SMSF is that capital gains are concessionally taxed. For example, a capital gain on a property held for longer than 12 months is taxed at only 10%, and in retirement pension phase any capital gains are tax free.
Borrowings are typically from 1-20 years. The SMSF has the option to:
LRBAs will suit those members of SMSFs who meet one or both of these criteria:
Borrowing inside SMSF is not a simple process and professional advice is required.
Some points you need to be aware of include:
This information has been produced by Australian Unity Personal Financial Services Ltd (‘AUPFS’) ABN 26 098 725 145, AFSL & Australian Credit Licence 234459. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making investment decisions. AUPFS is a registered tax (financial) adviser and any reference to tax advice contained in this document is incidental to the general financial advice it may contain. You should seek specialist advice from a tax professional to confirm the impact of this advice on your overall tax position. Nothing in this document represents an offer or solicitation in relation to securities or investments in any jurisdiction. Where a particular financial product is mentioned, you should consider the Product Disclosure Statement before making any decisions in relation to the product and we make no guarantees regarding future performance or in relation to any particular outcome. Whilst every care has been taken in the preparation of this information, it may not remain current after the date of publication and AUPFS and its related bodies corporate make no representation as to its accuracy or completeness. Published: December 2018 © Copyright 2018