Borrowing money in a SMSF?
Itrust Tax and Accounting
Smsf Loans, Smsf Setup, Smsf Admin
The trustee can undertake ‘limited recourse borrowing arrangements’ which are often incorrectly termed instalment warrants because prior to 2007 this was the only financial product that would allow borrowing inside super.
Limited recourse borrowing means that you can borrow money in your super fund as long as the lender uses only the asset purchased as security. i.e. the lender’s recourse is limited only to the purchased asset, it cannot take any other assets if you were to default on loan payments. This condition is in addition to a few others shown in the ATO extract below.
“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 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.”
, Smsf Loans
, Smsf Setup