You may have heard of SMSFs borrowing and limited recourse borrowing arrangements (LRBA) but here’s what you need to know first.
An SMSF is prohibited to borrow money, the superannuation laws provide limited exceptions where an SMSF can borrow/maintain a borrowing, these are listed below:
· An SMSF can borrow money to pay a member’s benefit payments (pension payment) as long as the borrowed amount does exceed 10% of total fund assets, the borrowing is for a maximum of 90 days, and the benefit payment is required to be made by law and without borrowing the SMSF would not be able to make the pension payment.
· An SMSF can borrow money to pay an outstanding superannuation surcharge liability as long as the borrowed amount does exceed 10% of total fund assets, the borrowing is for a maximum of 90 days, and the payment is required to be made by law and without borrowing the SMSF would not be able to make the payment.
· An SMSF can borrow money to cover the settlement of listed securities as long as the borrowed amount does exceed 10% of total fund assets, the borrowing is for a maximum of 7 days and the SMSF did not believe the borrowing was likely at contract date.
· An SMSF can borrow money and maintain borrowing when the borrowing forms part of a Limited Recourse Borrowing Arrangement (LRBA), as described below:
- An SMSF wishes to purchase an acquirable asset; real property or a parcel of identical assets such as a parcel of listed securities that cannot be traded individually – as defined by the legislation
- The acquirable asset is held by a custodian trust, where the custodian trust has legal ownership of the asset and assigns the beneficial ownership to the SMSF as well as providing the SMSF the right to acquire legal ownership of the asset after making one or more repayments
- The SMSF and lender are parties to an executed loan agreement, that confirms the lender’s right of recourse on the event of default is limited to the acquirable asset, hence protecting all other SMSF assets in the event of default
- The SMSF and any guarantors of the loan are parties to executed guarantee documentation, that confirms the guarantor(s) right of recourse it limited to the acquirable asset in the event the SMSF defaults with the lender
- LRBAs are complex structures and a very good understanding of the superannuation laws and rules is required, you should seek independent professional SMSF advice from appropriately qualified professionals.
Borrowing by SMSFs outside of these limited exceptions result in breaches of the superannuation laws and may have serious consequences for the SMSF.
