Westwood Conveyancing

What is a SMSF Limited Recourse Borrowing ?

A SMSF Limited Recourse Borrowing arrangement involves a loan being taken out by a SMSF to purchase an asset such as residential property (from a non-related party) or business real property.  

The asset is held in a separate security trust, with the SMSF being the beneficial owner of the asset. The SMSF will acquire legal ownership of the asset when the loan is repaid.  

In the event of the SMSF defaulting on the loan, the lender will only have recourse on the acquired asset. The lender will have no recourse on the other assets of the SMSF. 

Benefits 

• The SMSF will have beneficial ownership of an asset that it may not have been able to acquire without leveraging.
• The SMSF will receive all income and capital earnings from the acquired asset.
• Income received from the acquired asset will be taxed at a maximum rate of 15% if the fund is in accumulation phase, and 0% if the fund is in pension phase.
• As a SMSF is a trust, the assets of the SMSF are protected against creditors in the event of bankruptcy and this includes assets where the SMSF is the beneficial owner.     

Disadvantages and issues to Consider

• The SMSF trust deed must allow for the borrowing arrangement, and the borrowing arrangement must conform to the fund’s investment strategy.
• The SMSF borrowings can generally only be used to purchase assets from a non-related party however; business real property and other assets such as listed securities are exceptions.
• Cost may be high as there are various legal instruments such as a trust deed and investment strategy that may incur a fee as will establishing the security trust. There will also be loan costs, and if financial advice is sought, there may be an advice related fee.
• There will need to be sufficient liquidity in the fund to ensure that the funding obligations of the SMSF are maintained.
• The SMSF borrowing arrangement will need to be correctly structured.
• A SMSF can only claim a tax deduction on its deductible expenses such as the loan interest costs, at the superannuation tax rate of 15%.
• Any tax losses incurred by a SMSF are restricted in the fund and hence; cannot be used to offset any taxable income outside the fund. 

Source  :  SMSF Audits

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