Understanding Loan Rules and Regulations For SMSFs

Self-Managed Super Funds (SMSF) are a popular way for Australians to save for their retirement. However, many SMSF trustees are not aware that they can also use their fund to borrow money to invest in property or other assets. This type of borrowing is known as a “limited recourse borrowing arrangement” (LRBA) and it can be a powerful tool for SMSF trustees to grow their retirement savings.

One of the key benefits of using an LRBA is that it allows SMSF trustees to invest in assets that they may not have been able to afford to purchase outright. For example, if an SMSF trustee wants to purchase a property worth $500,000, they may only have $200,000 in their fund. With an LRBA, the trustee can borrow the remaining $300,000 and use the entire $500,000 to purchase the property.

Another benefit of an LRBA is that the interest on the loan is tax deductible. This means that the SMSF can claim the interest as a tax deduction, which can reduce the overall cost of the loan. Additionally, the rental income from the property is taxed at a lower rate than it would be if the property was held in the trustee’s personal name.

However, it’s important to note that there are several rules and regulations that must be followed when using an LRBA. For example, the borrowed funds must be used to purchase a single acquirable asset and the asset must be held in a separate trust until the loan is fully repaid. Additionally, the SMSF must have the ability to repay the loan and the borrowed funds must not exceed the market value of the asset.

SMSF trustees considering an LRBA should seek professional advice from a qualified financial advisor, accountant or lawyer to ensure that they understand the rules and regulations, and that the arrangement is structured correctly.

Disclaimer: This information should not be considered personal financial advice as it is intended to provide general advice only. This factsheet has been prepared by SuperHelp Australia Pty Ltd without taking into account your personal objectives, financial situations or needs.

References:

• Australian Taxation Office. (2021). Self-managed super funds: limited recourse borrowing arrangements. Retrieved from https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/Limited-recourse-borrowing-arrangements/
• Australian Securities and Investments Commission. (2021). Borrowing to invest in property using an SMSF. Retrieved from https://www.moneysmart.gov.au/superannuation-and-retirement/self-managed-super-funds/borrowing-to-invest-in-property-using-an-smsf
• Australian Taxation Office. (2021). Tax implications of self-managed super funds. Retrieved from https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/Tax-implications-of-self-managed-super-funds/