SMSF - How much can I borrow?
SMSF or DIY Super is regulated with various caveats when it comes to borrowing money from the fund. With the relaxation in rules in 2007, SMSFs now have a range of investment options that were not previously available. SMSFs generally cannot lend money, however, money can be borrowed under special circumstances. These loans can be used to purchase assets like property, shares, and managed funds.
The special circumstances include:
- 10% of the fund’s total assets can be borrowed for a period of 90 days.
- To settle security transactions for a period of 7 days. Money can only be borrowed if, at the time of the transaction, it was likely that the borrowing wouldn’t be needed.
- Borrowing under Limited Recourse Breaking Arrangement (LRBA) or Installment Warrants.
What is LRBA?
Under Limited Recourse Borrowing Arrangement, SMSF trustee can borrow money to buy an asset. If the SMSF trustee defaults on the loan, the lender can recover that asset and not lose money on the other assets. It ensures that the money in the super fund remains intact and the fund can still offer retirement benefits to the trustees.
How much can a SMSF trustee borrow?
The minimum amount that can be borrowed by a SMSF trustee is $100,000 subject to the borrowing capacity of your fund and lender’s approval.
If you have any further questions regarding borrowing and your SMSFs, give Bottom Line Control Sunshine Coast accountants a call on (07) 5471 7077 and we can discuss all the options with you.
The rules of borrowing under LRBA
SMSF is the sole responsibility of the members. The fund is used to provide retirement benefits to the members. The rules must be met to receive tax benefits from the funds. Failure to comply can lead to the disqualification of your fund and you could end up paying thousands of dollars in fines.
- The transaction should pass the “Sole Purpose Test”, i.e., the borrowing should be in line with the investment strategy of your super fund.
- You can only borrow money for purchasing an asset like property or block of shares. It is permissible to buy a single asset or collection of assets having the same market value.
- The property can be repaired or maintained but not renovated. Anything that can alter the structure of the property is strictly prohibited.
- The money cannot be used for improving the asset.
- The asset is to be held on trust until the loan is paid off. Once the loan is repaid, the SMSF trustee can acquire legal ownership of the asset.
- The money cannot be used for personal gains i.e. providing financial assistance to a fund member or members’ relative, family, or friend.
- The asset can be replaced by another asset as listed in the super law.
Advantages of borrowing money from SMSF
Some good reasons to borrow from your SMSF include:
- Allows for diversification of the investments
- Tax benefits on interest
Bottom Line Control - SMSF experts on the Sunshine Coast
If you need to borrow money using your Self Managed Super Fund we recommend seeking the professional advice of a SMSF Advisers who can guide you. This is crucial to ensure your purchase is complies with the ATO rules, as well as your fund’s investment strategy, risk profile, and exit strategy.
For the very best in Self-managed super fund advice, auditing, and investment assistance contact our experienced team on 5471 7077 or complete our online appointment request form today.
Sources:
https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-technical/Limited-recourse-borrowing-arrangements---questions-and-answers/?page=2#What_is_limited_recourse_borrowing_
https://www.ato.gov.au/Super/Self-managed-super-funds/Investing/Restrictions-on-investments/Loans-and-early-access/
