You can borrow money through your Super Fund. This is called, a limited recourse borrowing arrangement which is a specific type of borrowing arrangement that allows a Small to Medium Superannuation Fund (“SMSF”) trustee to borrow for investment purposes. To qualify, the borrowing must be established under an arrangement that satisfies the following criteria:
- The borrowing must be used to purchase a single asset.
- The asset must be held on trust for the SMSF.
- The trustee must have the right to acquire the legal ownership of the asset after making one or more payments.
- The rights of the lender, or any other person, against the trustee in relation to a default on the borrowing must be limited to the asset acquired with the borrowing.
- The asset must not be subject to any charge other than that provided in relation to the borrowing.
- The asset must not be replaced with another asset other than in certain specific circumstances.
This arrangement is permitted pursuant to section 67A of the Superannuation Industry (Supervision) Act 1993.
Under the limited recourse borrowing rules, the asset acquired with the borrowing must be held on trust so that the trustee of the SMSF acquires a beneficial interest in it. This means that the SMSF trustee will not be permitted to hold the legal title of the asset and that a separate trust will be required to be established to hold the asset until repayment is made. However, the SMSF will be entitled to all the income, such as rent, generated by the asset.
Once the loan has been repaid the legal title of the asset can be transferred to the SMSF.
Once an asset has been acquired under this type of arrangement the trustee will not generally be permitted to replace that asset with another asset other than in certain limited circumstances. For example, if an SMSF trustee acquired 100 shares in a company it would not be permitted to sell those shares and then use the proceeds to acquire shares in a different company under the same borrowing arrangement. In this case, the trustee would need to use the proceeds to extinguish the loan and then establish a new borrowing arrangement to acquire the shares in the different company.
The Federal Government has confirmed that a superannuation trustee who enters into a limited recourse borrowing arrangement for the purpose of purchasing an asset is to be treated as the owner of the asset for income tax purposes.
Before setting up a limited recourse borrowing arrangement an SMSF trustee should review and understand the risks involved.
Seek professional guidance should you be considering this kind of arrangement.
This article is for general information only and is not intended as legal advice. If you need specific help contact our office.
