Can I borrow in a Self-Managed Super Fund (SMSF)?

In previous years there have been many restrictions on borrowing in a super fund, yet the laws became a lot more relaxed in 2007 allowing super funds to now use limited recourse borrowing arrangements to purchase investment assets such as property. Under the correct structure the trustee of an SMSF can undertake ‘limited recourse borrowing arrangements’ (also referred to as LRBA’s) which are often incorrectly termed “instalment warrants” because prior to 2007 this was the only financial product that would allow borrowing inside super.

Limited recourse borrowing means that you can borrow money in your super fund as long as the lender uses only the asset purchased as security. I.e. the lender’s recourse is limited only to the purchased asset, it cannot take any other assets if your super fund defaulted on loan payments. This condition is in addition to a few others shown in the ATO extract below.

“An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies each of the following conditions:

• the borrowed monies are used to acquire a single asset, or a collection of identical assets that have the same market value (that are together treated as a single asset), which the fund is not otherwise prohibited from acquiring (called the ‘acquirable asset’). The new law makes it explicit that borrowed money applied to expenses incurred in connection with the borrowing or acquisition (such as loan establishment costs or stamp duty), or expenses incurred in maintaining or repairing the acquirable asset, is allowed
• the borrowed monies are not applied to improving an acquirable asset
• the acquirable asset is held on trust (the holding trust) so that the SMSF trustee receives a beneficial interest in the asset
• the SMSF trustee has the right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest
• any recourse that the lender or any other person has under the arrangement against the SMSF trustee is limited to rights relating to the acquirable asset. This limitation applies to rights directly or indirectly relating to a default on the borrowing and related charges or directly or indirectly relating to the SMSF trustee’s rights in respect of the acquirable asset (for example, rights to income from the asset)
• the acquirable asset is not subject to a charge other than as provided in relation to the borrowing by the SMSF trustee
• the acquirable asset can be replaced by another acquirable asset that the SMSF is not otherwise prohibited from acquiring, but only in very limited circumstances as listed in the super law.”[1]

Yes. Each drawdown constitutes a new borrowing and can be done so long as the conditions above are met. However, you are not allowed to re-draw against the equity of an existing asset as this would breach the superannuation rules.

Yes. You can apply borrowed money towards expenses incurred in connection with the borrowing. However you cannot borrow money to construct a building on vacant land or use it to make improvements such as renovations (this would create a new asset).

Borrowing rules have become so relaxed in super that you can even buy CFDs – one of the most controversial and risky financial products available to retail investors! From the ATO in relation to CFDs:

“Issue: Has a trustee of a Self-Managed superannuation fund (SMSF) contravened the Superannuation Industry (Supervision) Act 1993 (SISA) by investing in CFDs? Decision No. The trustee of an SMSF has not contravened the SISA by investing in CFDs where they have not deposited fund assets with the CFD provider.”[2]

You will find that lenders generally impose a maximum Loan to Value Ratio for borrowers mainly because they are not legally allowed to have recourse over any of the super fund’s other assets. Depending on your superannuation structure, you will find that banks will lend anywhere up to 80% of the asset value depending on the type of asset. For example a residential investment property can have a LVR of up to 80% if certain conditions are met.