FAQ: Can my SMSF borrow money to invest?
The savings built up in your SMSF represent a significant source of capital you can use to further grow your wealth. However, there may come a time when it’s not enough. Being able to borrow money in this situation would be critical to your investment goals.
Can my SMSF borrow to invest?
Yes, providing certain requirements are met. An SMSF can borrow through what’s known as a Limited Recourse Borrowing Arrangement (LRBA), which you can use to purchase what the Australian Taxation Office terms a “single acquirable asset”.
What is a single acquirable asset?
This is a term that requires some unpacking. An asset qualifies as ‘acquirable’ if it’s not one that trustees are prohibited from acquiring under the SIS Act or other laws, and as long as it’s not money – in other words, Australian or foreign currency.
Despite the use of the word “single”, the rules are not necessarily so rigid. A collection of assets that are identical and hold the same market value as each other – such as a parcel of 1,000 shares in a company – also qualify as a single acquirable asset.
Are the rules different when it comes to buying property?
LRBAs are often used by SMSFs to purchase real estate, but they have some specific rules attached if the property is held in multiple titles – an apartment and a car space, for example. In this case, separate LRBAs will be required for each title.
In the case that the different titles can’t be sold separately, they will be considered a single acquirable asset, and so can be part of only one LRBA.
What are some specific requirements?
There are a number of requirements that must be met for your loan to be legitimate. For one, the asset must be held on trust by a custodian for the benefit of the SMSF. While the legal title of the asset is held in the name of the custodian, the beneficial right belongs to the SMSF. The rights of the lender, meanwhile, are limited to those that relate to the asset held by the custodian (all other unencumbered assets of the SMSF are protected from the lender).
Additionally, borrowings can be used to maintain or repair the asset, but not improve it. This means you can use the LRBA to fix a plumbing issue, but you can’t use it to add a second storey to the property.
Note that no two individual’s circumstances are the same, and that this shouldn’t be taken as universal financial advice. If you want to know more about how LRBAs relate to your situation, or generally need further help with an SMSF, contact one of our experienced SMSF advisors, who can answer your questions and offer guidance.