Self Managed Superannuation – Limited Recourse Borrowing Arrangement (LRBA)
Many individuals who use self-managed superannuation funds (SMSFs) seek to inject wealth into their SMSF by using borrowing techniques.
However, the Superannuation (Industry Supervision) Act 1993 (SIS Act) requires that this borrowing takes place using a limited recourse borrowing arrangement (“LRBA”) structure. These rules are quite complex and must be followed to the letter or else the fund risks being made non-complying.
The general borrowing rules
SMSFs are generally prohibited from borrowing money by section 67 of the SIS Act. This prohibition is designed to ensure superannuation funds do not take on undue levels of risk. However, section 67A of the SIS Act allows SMSFs to borrow using a LRBA.
Broadly, the requirements that must be satisfied in relation to the use of a LRBA include the following:
•Borrowed money is applied for the acquisition of a single acquirable asset [SMSFR 2012/1] including expenses incurred in connection with the borrowing or acquisition, or in maintaining or repairing the acquirable asset – Example, conveyancing fees, stamp duty, brokerage or loan establishment costs, General R&M to the asset.
•Borrowed money can be used to repair or maintain an asset but not to improve an asset. This prohibition on improvements is likely to create issues for SMSFs investing in real estate as it will place limits on any renovations they may wish to undertake.
•The single acquirable asset is to be held on trust allowing the SMSF to be the beneficial owner of the single acquirable asset.
•The SMSF has the right to acquire the legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest.
•The rights of the lender or any other person against the SMSF in case of default on the borrowing is limited to the rights against the acquirable asset.
The general structure of a SMSF using borrowing is depicted below:
If you would like to discuss how we can help you borrow using a SMSF please contact Shaun Otto for a no-obligation consultation.
Disclaimer: Any information or advice we provide to you in relation to this article is general information only and does not constitute or convey advice per se. Note this general information is provided using the ‘accountant exemption’, which provides an exemption from AFS licensing for particular ‘exempt services’. The person providing this general advice is not licensed to provide financial product advice under the Act, and taxation is only one of the matters that must be considered when making a decision on a financial product. You should therefore, consider taking advice from the holder of an Australian Financial Services Licence before making a decision on a financial product.