Key takeaways
- As a rule, an SMSF cannot borrow money.
- The main exception is a limited recourse borrowing arrangement (LRBA), used to buy a single asset.
- Under an LRBA, the lender's recourse is limited to the asset bought, protecting the rest of the fund.
- Borrowing adds cost, complexity and risk, so it needs careful planning and advice.
The starting point in super law is simple: an SMSF cannot borrow. That rule protects members' retirement savings from the risk of geared losses. There is one significant exception, the limited recourse borrowing arrangement, and it is what makes buying property with borrowed money possible inside super.
The general prohibition
Trustees are prohibited from borrowing, with only narrow exceptions. Short-term borrowing is allowed in very limited circumstances, for example to meet a benefit payment or settle a securities transaction, and only for short periods and small proportions of the fund. Beyond that, borrowing means an LRBA.
The exception: limited recourse borrowing
A limited recourse borrowing arrangement lets the fund borrow to acquire a single asset, most commonly a property. The defining feature is that the lender's recourse is limited to that one asset. If the loan defaults, the lender can take the asset but cannot pursue the fund's other investments. This is what contains the risk. We explain the mechanics in LRBA explained.
What borrowing involves
- A separate holding trust. The asset is held in a bare trust until the loan is repaid. See bare trust.
- A single acquirable asset. One asset, or a collection of identical assets with the same market value, per arrangement.
- No improvements with borrowed money. Borrowed funds can repair and maintain, but cannot improve an asset in a way that changes its character.
- Limited lenders. Fewer banks lend to SMSFs than to individuals, so finance can be harder to arrange.
Is borrowing worth it?
Gearing can amplify gains, but it also amplifies losses, adds cost, and reduces the fund's flexibility. The arrangement must still fit the fund's investment strategy and cash flow. This is general information, and borrowing in super is a significant step, so model it carefully and get advice before proceeding.
Frequently asked questions
- Can an SMSF take out a normal loan?
- No. An SMSF cannot borrow in the ordinary way. The main exception is a limited recourse borrowing arrangement to acquire a single asset, plus very limited short-term borrowing in narrow circumstances.
- What does 'limited recourse' mean?
- It means the lender's rights are limited to the single asset bought under the arrangement. If the loan defaults, the lender can take that asset but cannot pursue the fund's other investments, which protects the rest of the fund.
- Can I use a fund loan to renovate a property?
- You can use borrowed money to repair and maintain, but not to improve the property in a way that changes its character. Major improvements must be funded from the SMSF's own money, not the borrowing.
