Generally, funds are not allowed to borrow money.
One exception is a limited recourse borrowing arrangement.This is where an SMSF borrows money to buy an asset, and if the SMSF defaults on the loan, the lender’s rights are limited to recovering only that asset – so the other SMSF assets are still protected.
This type of arrangement can be tricky – and there are serious consequences if you get it wrong.
Example
Kelly makes a snap decision to buy a property for her SMSF. The fund borrows money to pay for it.
Kelly’s Auditor reports to the ATO that the loan is not a limited recourse borrowing arrangement.As she has broken the super laws, the ATO can direct Kelly to sell the property to fix her mistake – which could be very costly for the fund.The property may sell for less than the fund paid for it, and there are always expenses associated with buying and selling property.
Kelly is fined thousands of dollars – which she has to pay out of her own pocket.
The ATO can also make the fund non-complying which means Kelly’s fund could lose almost half of its assets!
One careless investment decision means Kelly may need to postpone her retirement.
But if done the right way, a limited recourse borrowing arrangement can work!
Example
Bob is considering buying a property through his SMSF. Bob knows there are a lot of rules about borrowing. He works with his advisor and the bank to meet the strict rules required of a limited recourse borrowing arrangement before buying the property. The fund is audited with no issues to report!
Bob’s SMSF continues to grow and his retirement plans are looking good!
So if you are thinking about borrowing money through your fund, first make sure you understand all the rules or consider speaking with SMSF Options to get some advice.
For more SMSF information, take a look at our other videos – or contact us here