Since late 2007, a self-managed super fund (SMSF) has been allowed to borrow money for investment purposes following the introduction of an additional exception to the general borrowing prohibition – one that continues to exist under superannuation law.
This additional exception to the borrowing prohibition is provided in the form of a limited recourse type of borrowing. In essence, the relevant asset is held on trust to provide limited security for the outstanding loan, but the benefits of the ownership (such as rent or dividends) flow directly to the fund. If the fund defaults on the loan, then the rights of the lender are limited to the asset which is the subject of the borrowing, and the fund’s loss is limited to the loss of the beneficial interest in the asset and any payments made prior to the default – hence why it is called a limited recourse borrowing arrangement (LRBA).
How the arrangement works
- An SMSF arranges to borrow money on a limited recourse basis, which it then transfers to a Holding Trust, along with its contribution to the purchase price of the asset.
- The Holding Trust would then arrange to purchase and hold the asset on trust for the SMSF.
- The SMSF would receive the beneficial interest in the asset and would be able to instruct the Trustee in relation to the asset.
- Once the SMSF repays the loan it can then arrange for the legal ownership of the asset to be transferred from the Holding Trust to the Fund.
The five most common questions about buying property with super
1. Do I need to change my SMSF's trust deed?