How to borrow inside an SMSF

There was a time when SMSFs simply could not borrow money to invest in property or shares. All that changed in September 2007. New super laws came in that provided a very limited exception to the longstanding (and still existing) general prohibition on super funds borrowing money to buy assets it was otherwise able to invest in, including residential and commercial property and shares, in very limited circumstances. Borrowing inside super is not appropriate for everyone, and requires careful consideration and good advice.    

Subsequent tax rulings in 2010 through to 2013 have clarified the can do’s around SMSFs borrowing money. It all revolves around what the super legislation calls, “a limited recourse borrowing arrangement” or LRBA.  In practice a LRBA means the recourse the lender has against the borrower is strictly limited to the single asset purchased using the LRBA. That said it’s permissible for lenders to seek personal guarantees from fund members, to support an LRBA, which may provide the lender access to member’s assets held outside super. Each new single asset purchased with borrowed funds needs its own LRBA. 

Fund members may also lend their SMSF money, via an LRBA, instead of using bank finance, however, the loan transaction and all supporting documentation must meet the strict requirements of an LRBA. Professional assistance with all documentation is strongly recommended.

All the way with LRBA

LRBA’s have become an increasingly popular choice for SMSF trustees looking to gear their super without fear of breaking any thou shalt not borrow rules.

So how does it work?

There are ten key considerations when you’re looking to purchase an asset via an LRBA:

  1. Does borrowing fit with your investment strategy?

Borrowing money inside super involves taking on additional risk. Is that risk consistent with the fund member’s risk profile(s), and investment strategy?  It’s also important to consider the age of the fund’s members and the fund’s capacity to meet any pension payment obligations. Does the fund have sufficient cash flow, or access to cash to meet loan repayments (that can very well vary according to interest rate movements) and also pay any minimum pension payments? What would happen if the investment property purchased, was without a tenant for several months? And as part of your investment strategy, you need to consider the issue of insurance to provide liquidity when a benefit (for retirement/death/TPD) needs to be paid out from the fund


  1. Does your trust deed permit borrowing?

It’s essential that the SMSF trustees be legally capable of entering into the LRBA. SMSF trust deeds created prior to September 2007 generally don’t include a ‘power to borrow and pledge security’ clause. Check your trust deed and make any necessary changes, prior to entering into the loan transaction.

  1. Know the ground rules

When it comes to your purchase, as a trustee you are always obliged to comply with the sole purpose test and the in-house asset rules. Yes, you can borrow to purchase an asset, but always remember it must be an asset that your SMSF is allowed to purchase anyway.

  1. The art of borrowing

This begins with knowing you are borrowing to purchase a brand new asset of the fund. You can’t borrow against an asset that fund already owns. This means (for example) you can’t borrow to erect a commercial building complex on that block of land your SMSF already owns, or even make improvements on a property your SMSF already owns. The fund can however use its own cash to make these types of improvements.

  1. A Bare Trust deed

A Bare Trust deed is a legal document that ensures the proper arrangement is in place for your SMSF to borrow funds for the acquisition of assets, with the property being legally held through a separate property trustee, whilst the LRBA is in place. 

A correctly set up Bare Trust deed documents the relationship between the SMSF trustee and the property trustee, and also gives you surety that when you do extinguish the loan and transfer the property to the name of the SMSF trustee, you don’t attract ad valorem stamp duty (that’s tax according to the value of the property), GST or capital gains tax, on the transfer.  Stamp duty requirements may vary in each state and territory so seeking localised tax and stamp duty advice is recommended.

  1. Borrowing in your own name

You can also borrow in your own name and then on-lend that money to your SMSF, as a related party loan. The transaction must also be correctly documented, including a formal loan agreement and repayment schedule. Due to the strict nature of this process we recommend you seek professional help or guidance with this administration.

  1. Borrowing to buy your own commercial property

If you buy a commercial property through your SMSF that you already own outside of super, it means that the borrowed money goes directly to you and may be reinvested in your business, or elsewhere. If instead, you sold your commercial property outside of the SMSF in the future, and for whatever reason could not take advantage of the small business capital gains tax (CGT)  concessions, then it should be subject to capital gains tax , and be taxed at your individual marginal rates (after application of the discount, if available) However, consider this: you would pay no CGT if your SMSF sold that same property when it is held in pension phase, or a maximum of 15% CGT if sold during accumulation phase (discounted to 10% if the asset has been owned for more than12 months).

  1. Borrowing to buy residential property

Outside an SMSF structure, lenders will offer up to 95% LVR but within an SMSF you can expect that same lender to offer a maximum of 80% of the property’s value. As per the rules, you can’t live in the property or rent it out to family or friends.

There are very strict rules around what you can do to a purchased property using borrowed funds. You can carry out repairs and maintenance, even with borrowed funds but you can only make improvements using other cash from the SMSF.. You cannot borrow to carry out renovations or improvements. In addition, you cannot improve the asset to the extent that the asset has functionally changed and you are deemed to have replaced the asset.

  1. Keep an eye on conveyancing

Whether its commercial or residential property it’s important to do your conveyancing correctly, particularly (for example) when stamping Bare Trust documents. Poor conveyancing may lead to stamp duty concerns in the future if you have difficulty proving the real purchaser. 

  1. Seek financial advice

This last consideration also needs to be your absolute first step towards borrowing within an SMSF.  Always seek independent financial advice from qualified SMSF experts before making any decisions about borrowing in your SMSF. The rules are complex and strict compliance is required.