A self-managed super fund (SMSF) can borrow money, but only within strict legal parameters. Since regulatory changes in 2007, trustees have been able to access a broader range of investment opportunities, including those involving borrowing. Experienced SMSF accountants can help trustees understand how these rules apply in practice.

Although SMSFs are generally restricted from lending, they are permitted to borrow funds to acquire assets such as shares, managed funds, and property. However, these arrangements must comply with specific legislative requirements.

Under SMSF borrowing rules, any asset acquired must qualify as a single acquirable asset. For example, a parcel of identical shares purchased at the same time and with the same value can be treated as one asset for compliance purposes.

Key Takeaways

• SMSFs can borrow, but only under tightly controlled legal conditions.
• Borrowing is usually structured through a Limited Recourse Borrowing Arrangement (LRBA), where the asset is held in a separate trust.
• Funds borrowed must be used strictly for acquiring eligible investments.
• Short-term borrowing is permitted in limited situations, such as paying member benefits or settling transactions.
• Trustees must ensure compliance with the sole purpose test and their fund’s governing rules.

There are only certain situations where borrowing is allowed within an SMSF:

Trustees may borrow up to 10 percent of the fund’s total value for a period of up to 90 days.
Short-term borrowing is also permitted for settling security transactions within seven days, provided the need for borrowing was not anticipated.

Longer-term borrowing is typically done through LRBAs or similar structured arrangements.

How much can an SMSF borrow for property?

The amount an SMSF can borrow depends on the fund’s financial position and lender requirements. In many cases, borrowing may start from around $100,000, with some lenders offering loans up to several million dollars, subject to approval.

A key factor lenders assess is the loan-to-value ratio (LVR), which compares the loan amount to the property’s value. A lower LVR, achieved through a higher deposit, generally reduces lender risk. Some lenders may offer up to 80 percent LVR, meaning the SMSF must fund the remaining portion.

What is an LRBA?

An LRBA allows an SMSF trustee to borrow funds, typically from a bank or lender, to acquire a single asset. In some cases, borrowing from related parties may also be permitted under strict conditions.

The purchased asset must be held in a separate holding trust until the loan is repaid. Any income or capital growth from the asset flows back into the SMSF, while the fund is responsible for all associated expenses.

A key feature of an LRBA is that the lender’s recourse is limited to the specific asset purchased. If the loan defaults, the lender can only claim that asset, protecting the rest of the SMSF’s holdings.

Separate LRBAs are generally required for different assets acquired at different times, and there are restrictions on how those assets can be managed during the loan period.

Rules and considerations for SMSF borrowing

Trustees are fully responsible for ensuring their SMSF complies with Australian superannuation laws. Failing to meet these obligations can result in significant penalties and the loss of tax benefits.

Borrowing within an SMSF can provide diversification and potential tax advantages, particularly in relation to interest deductions. However, it must always align with the fund’s investment strategy and meet the sole purpose test.

Key rules include:

• The borrowing must support the fund’s investment strategy and retirement objectives.
• Assets acquired must be permissible under superannuation law, such as property or shares.
• Borrowed funds cannot be used to improve or significantly alter an asset.
• The asset must remain in a separate trust until the loan is repaid.
• Funds must not be used for personal benefit or to assist related parties.
• Asset replacement is only allowed in limited circumstances under superannuation law.

Borrowing through an SMSF can be a powerful strategy when used correctly, but it comes with complexity and risk. Working closely with a trusted Gold Coast accountant can help ensure your fund remains compliant and structured appropriately for long-term success.