Can an SMSF borrow money?

Generally, the Trustees of SMSFs are prohibited from borrowing to buy an asset for the funds under the Superannuation Industry (Supervision) Act 1993 (SIS Act) except when borrowing is under a limited recourse borrowing arrangement (LRBA). A LRBA is a loan that the SMSF took out a loan from a third party lender. The Trustee then uses the funds from the borrowing to fund the purchase that is permitted under the super law requirements. The asset purchased under the LRBA will be held in a separate trust. If the loan defaults, the lender's rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF.

Self-Managed Super Funds (SMSF) can borrow money only in a very limited circumstances as detailed on the ATO website here.

The Super law requirements for LRBA by super trustees depend on when the arrangements were entered into.

For Arrangements entered into on or after 7 July 2010

An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies each of the following conditions:

  • The borrowed monies are used to acquire a single asset, or a collection of identical assets that have the same market value (that are together treated as a single asset), which the fund is not otherwise prohibited from acquiring (called the 'acquirable asset'). The new law makes it explicit that borrowed money applied to expenses incurred in connection with the borrowing or acquisition (such as loan establishment costs or stamp duty), or expenses incurred in maintaining or repairing the acquirable asset, is allowed.
  • The borrowed monies are not applied to improving an acquirable asset.
  • The acquirable asset is held on trust (the holding trust) so that the SMSF trustee receives a beneficial interest in the asset.
  • The SMSF trustee has the right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest.
  • Any recourse that the lender, or any other person, has under the arrangement against the SMSF trustee is limited to rights relating to the acquirable asset. This limitation applies to rights directly or indirectly relating to a default on the borrowing and related charges or directly or indirectly relating to the SMSF trustee's rights about the acquirable asset (for example, rights to income from the asset).
  • The acquirable asset is not subject to a charge other than as provided in relation to the borrowing by the SMSF trustee.
  • The acquirable asset can be replaced by another acquirable asset that the SMSF is not otherwise prohibited from acquiring, but only in very limited circumstances as listed in the super law.

There are lots of rules about borrowing money under SMSF and it can be complex sometimes. If you are thinking about borrowing money through your fund, make sure you understand the rules or get in touch with us to get some advice.