Understanding the limited recourse borrowing arrangement

When taking out a self managed super fund (SMSF) loan in order to invest, you will need to create a specific borrowing arrangement. This is known as a limited recourse borrowing arrangement (LRBA).

In order to ensure your structure meets LRBA guidelines, you must meet certain guidelines.

First, the borrowing must be used to obtain a single acquirable asset. Keep in mind that any money borrowed can also be used to pay for expenses arising from acquiring the asset, such as legal costs, application fees, stamp duty, etc.

This asset must be held in trust for the SMSF so the trustee can acquire a beneficial interest in it. Once the debt has been taken care of, the SMSF can assume full legal ownership.

As far as recourse in the case of default, the rights of the lender or any other person against the trustee must be limited to the single asset acquired when borrowing. In this way, SMSF loan borrowers can rest easy knowing any other assets of theirs are protected.

The asset cannot be subject to any other charges outside those related to the borrowing. And, except in specific cases, the asset cannot be replaced by another asset.

The fund’s balance sheet needs to reflect the asset and the loan, as well as any depreciation costs if there are any.
Borrowers who utilise this type of loan can benefit from receiving all income and capital growth from a property investment even if it has not been paid off. Additionally, you can use income from a rental property to help pay off the loan.

Also, interest expenses can be claimed as a tax deduction by the SMSF, reducing how much it has to pay in taxes.

If you want to explore your options concerning SMSF loans, contact the specialists at Redrock.