Self-Managed Super Funds

Investment decisions and rules

Limited recourse borrowing

An SMSF can borrow money to buy investments but the rules are complex and very strict on how this should be set up. It is generally advisable to engage a financial adviser or legal professional to help with setting up these arrangements. 

To summarise the rules:

  1. The money borrowed must be used to acquire a single asset or a collection of identical assets that have the same market value as each other and are traded together as a collection (e.g. a collection of shares in the same company).
  2. The asset must be held in a separate trust until fully paid off.
  3. If the trustee defaults on the loan, the amount that can be recovered by the lender is limited to the value of the asset.
  4. The money borrowed can be used to make repairs to the asset but the money borrowed cannot be used to make improvements (i.e. renovations, extensions or any other material change cannot be made to asset).
  5. The loan must be on commercial terms if a related party is the lender.

Please note: Repayments from limited recourse borrowing arrangement will cause a credit to your super transfer balance account. These credits increase your transfer balance account and reduce your available personal cap space. The credit will arise where the payment results in an increase in the value of your superannuation interest that supports your superannuation income stream that is in the retirement phase Importantly, this applies in relation to a limited recourse borrowing arrangement that arises under a contract entered into on or after 1 July 2017. Furthermore, refinancing a pre-1 July 2017 limited recourse loan may also remain exempt from this change if certain criteria are met.