Borrowing within a SMSF (also referred to as a Limited Recourse Borrowing Arrangement)

Self Managed Super Funds (SMSF) can now borrow to buy an asset. This asset could be a commercial or residential property or a collection of identical shares.
Rogerson Kenny SMSF Accountants have assisted a number of clients with borrowing in their SMSF to acquire a commercial property which they then operate their business out of.

As long as arm's length conditions are met, this can be a fantastic strategy for a SMSF. Please contact Mark Rogerson for more information on 03 9802 2533 or email by clicking here.
In my book, there are 5 main ways a SMSF can acquire property, please click this line to read more.

Here are a few rules on borrowing in a SMSF:

  • Borrowing must be for the acquisition of a single acquirable asset (a collection of 1,000 BHP is a single acquirable asset, as they are identical assets. A mixture of BHP, CBA, ANZ are not identical, likewise two off the plan apartments are not identical).
  • Borrowing can also be used to incur expenses in connection with the acquisition of the asset (stamp duty, solicitor fees, loan establishment costs etc).
  • In SMSFR 2011/D1 (draft ruling released 14 Sept 2011), the Commissioner of Taxation has indicated that repairs and maintenance can be funded from subsequent draw downs of an existing loan. However, if an asset is already owned outright, a SMSF cannot borrow to fund repairs or maintenance.
  • Title of asset is held on trust, for the benefit of the SMSF
  • Title of asset passes to SMSF when the loan is repaid
  • There should be no Capital Gains Tax, Stamp Duty or GST on the above transfer (the requirements vary state to state)
  • Can refinance and can draw down on loan for repairs and maintenance (not improvements)
  • Improvements - ATO recently (14 Sept 2011) issued draft ruling on this (click here for Draft Ruling SMSFR 2011/D1), looks like improvements can be carried out but not from borrowed monies. This means other money within the SMSF could be used for the improvement. Trustees need to be careful here, as if they pay for the improvements from their personal funds, this will be deemed a contribution.
  • The asset the improvement is carried out on can not be entirely replaced or altered to such an extent that it  now has a different function or purpose.
  • The lender and any other person involved in the borrowing, only has recourse against the acquirable asset in question, not the other super benefits (however all banks require a directors guarantee to give them further comfort)
  • Almost everything else operates as per normal. The full value of the asset appears in the Balance Sheet, as does the loan liability. Rent is recorded as income and expenses as expenses, all in the SMSF's accounts. The bare trust does nothing other than hold the title of the asset in question. It doesn't not have a bank account, lodge tax returns, prepare financial reports or have a TFN or ABN.
An example of a borrowing structure with a SMSF

 


Some Key Considerations:
  • Title of property transfers to SMSF on repayment of loan, with no GST, Capital Gains Tax or stamp duty (the stamp duty is state specific and needs very careful consideration when the structure and documents are set up)
  • Best Practice is to have the full structure in place before you sign the contract. Be careful of using "and / or nominee" clauses, especially in states other than Victoria (if not done correctly, this may give rise to double stamp duty)
  • A bank, member or related party can be the lender
  • All loans, interest and rent must be at commercial terms
  • Lender and any other entity only has recourse over the asset in the security trust
  • Can only hold one property per security trust structure. Similar assets can be held in the one security trustee, eg. 1,000 BHP shares
  • With a Business Real Property (commercial property) you can (a related party to the SMSF) operate your business from the property your SMSF owns – providing everything is at commercial terms
  • Your SMSF can borrow to acquire Business Real property from yourself or a related party (at market value). This cannot be done with residential property.
  • A SMSF cannot acquire residential property from members or from a related party of the fund.
  • Please download and view Mark's SMSF Proprty Matrix - this should clear up what a SMSF can buy and use and who it can buy it from! Download Here
     

 Please see Mark Rogerson's blog on the 5 main ways a SMSF can acquire property

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