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: The repayment of the principal and interest of a limited recourse borrowing arrangement from your accumulation account will be a credit in your transfer balance account (leading to an increase your transfer balance account and a reduction in your available personal cap space) where the fund makes a loan repayment and as a result there is an increase in the value of the income stream. 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.