It’s quite common for investors to find they are a little short of the cash needed to buy an asset, particularly bulky assets, such as property. The good news is that self-managed superannuation funds (SMSFs), also known as do-it-yourself (DIY) super funds, are permitted to borrow money from a third party lender under what’s known as a Limited Recourse Borrowing Arrangement.
Some of the major banks have loans that are specifically tailored to SMSFs. But as with most things in super, strict rules apply.
SMSF trustees are allowed to use a limited recourse borrowing arrangement to buy a single asset (such as a house) or a collection of identical assets that have the same market value (such as a bundle of BHP shares). The asset is then held in a separate trust within the fund. The purpose of this is to limit the lender’s access to the asset in the event of a loan default, therefore protecting the SMSF members’ retirement benefits.
One common question SMSF trustees ask is if a member of the fund is allowed to lend money to the SMSF. The short answer is, yes, they can, but it is important to note that any transaction between an SMSF and a member will be closely watched by the Australian Taxation Office (ATO).
The ATO will check to make sure the loan does not conflict with the interest of the SMSF, that is, that its sole purpose is to provide retirement benefits to its members. They will also look to see if the agreement has been made on a commercial, arm’s-length basis, which means the terms of the loan must be no more or less favourable than elsewhere on the market. Further, the ATO will check that the fund does not breach the in-house asset rules or rules pertaining to buying assets from related parties.
SMSFs can also provide loans, provided these are also made on a commercial, arm’s-length basis. However, one key point to note here is that unlike borrowing money, an SMSF can’t lend money to a related party of the fund, which includes trustees, members and their relatives.
The super rules regarding borrowing to buy property in an SMSF have recently been relaxed to allow trustees to make certain improvements to a property. To find out more about this and borrowing in general, please read: