Limited Recourse Loan or Limited Recourse Borrowing Arrangement

Six Important Things to Know about Borrowing in Super ( Limited Recourse Loan )

Are you thinking of purchasing a property in your SMSF by using a Limited Recourse Loan ?

This type of transaction has become more prevalent over recent years due to various amendments to the superannuation law. The decision to borrow within super requires careful consideration as it may not be suitable for your fund but if you’ve decided that it is right for you there are a number of important aspects that you need to be aware of.

1. Check your trust deed to ensure that it allows for borrowing, the granting of security over assets and the holding of assets in trust on behalf of the fund.
2. The fund’s investment strategy needs to be reviewed to ensure that it considers the risks, liquidity and diversification aspects of the purchase and the borrowing.
3. The SMSF, the Custodian (Bare) Trust and the Custodian Trustee must be in existence before the purchase of the property and the Custodian Trustee and SMSF Trustee cannot be the same.
4. Avoid paying double transfer (stamp) duty. Each state has different rules on stamp duty when the property is transferred from the Bare Trust to the SMSF and the name on the contract is one important consideration. Seek expert legal assistance upfront to avoid an unwanted bill later on.
5. Make sure that what is being purchased is allowable. The usual rules (and the exceptions) prohibiting the acquisition of assets from members or related parties still apply. The investment must be a single, acquirable asset. Some things that would not qualify are chattels (such as a furniture package), developing a property on a block of land or purchasing a residential property from a related party.
6. Don’t forget to do your due diligence when choosing the property and the loan.

This is only a brief summary of some of the things to be aware of. Seeking expert assistance at the outset will help to ensure that the arrangement is structured appropriately so that it complies with the relevant legislation and does not entail unwanted costs.

At Optima Super we can assist with the establishment of an SMSF with a borrowing structure as well as a deed upgrade if needed.

Related Links

The Australian Tax Office – Limited Recourse Borrowing Arrangements.

Disclaimer.   In providing this information Optima Super is not making any recommendations as to whether the acquisition of an investment under a limited recourse borrowing arrangement is or is not a suitable investment for any particular superannuation fund. We strongly recommend trustees of super funds should obtain independent legal and financial advice as to whether the acquisition of an investment under a limited recourse borrowing arrangement is an appropriate investment for that fund.