Previously SMSF were prohibited from borrowing however, in certain circumstances Section 67A of the Superannuation Industry Supervision Act (SIS) 1993 and a number of recent ATO draft rulings have provided opportunities for SMSF to use Limited Recourse Borrowing Arrangements (LRBA) to invest in property.
As a result of these rulings a trustee of a SMSF can consider LRBA to invest in property assets as part of the funds overall investment strategy however must ensure the following conditions are satisfied;
- 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 in respect of 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.
These changes to allow SMSF to borrow has lead to many lenders introducing specific loan products in the market to cater for the borrowing needs of SMSF. At Professional Finance Brokers our specialist finance consultants can assist in arranging the finance component of any SMSF borrowing transaction and can help you choose the right lender to reflect your SMSF borrowing requirements.
So if your SMSF is looking to borrow money to purchase an investment property and requires expert finance advice give one of our specialist business finance consultants a call on (07) 3349 9044 or contact us now.