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?
You need to make sure your trust deed is up to date. The governing rules of an SMSF must allow the trustee of the fund to borrow under section 67(4A) of the SIS Act before any instalment warrant type arrangement or any other limited recourse borrowing arrangement can be entered into. SMSF trust deeds dated pre September 2007 should be reviewed and updated.
2. Who pays the deposit to purchase the property?
The deposit for the property should ‘practically’ be paid from a bank account in the name of the SMSF.
3. What name goes on the contract?
The name on the contract to purchase the property when an SMSF loan is used is the trustee of the Holding Trust. If you don’t have the correct name on the contract you will need to go back to the vendor and arrange for an entirely new contract to be completed with the correct name.
4. How much can my SMSF borrow?
An SMSF trustee can borrow from either an unrelated lender (e.g. a bank or building society) or a related lender (e.g. the SMSF members personally, the trustees of a related family trust).
Depending on the lender, you can generally borrow up to 80% for residential property or 65% to 70% for commercial property. The loan to value rations are of course subject to specific lending criteria and may differ depending on whether you have a corporate or individual trustee structure.
5. What can the Holding Trust invest in?
The loan must only be applied for the acquisition of the ‘single acquirable asset’. That asset must be an asset that the SMSF trustee is not prohibited from directly investing in. It can’t acquire an asset from a related party unless it falls under one of the exceptions, e.g. business real property or listed securities.
Please note that the above list is not exhaustive.
What to do?
As the borrowing is not treated as a contribution, there is no age restriction on who can use the strategy. However, borrowing is not for everyone and each member should seek advice on the appropriateness of a gearing strategy for their risk profile. It is important to remember that if you borrow money, you have to pay it back.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.
