SMSF – limited recourse borrowing (LRB)

In general, any borrowings are strictly prohibited within a Self-Managed Superannuation Fund (SMSF). However, there is only one reason that it would be allowed; which is, to use the borrowed funds to purchase an asset. Here are the criteria to fulfil before proceeding:

• A borrowing arrangement is permitted to purchase a ‘single acquirable asset’, whereby the asset is held in a holding trust (legal owner); the SMSF trustee will acquire a beneficial interest in the asset, as for the lender, his right of recourse in the default is only limited to the asset held in a building trust. This is as according to section 67A of the Superannuation Industry (Supervision) Act 1993 (Cwlth).
• Money borrowed under LRB arrangements can also be spent on expenses used for repairs and maintenance of the ‘single acquirable asset’ whether at the time of purchase, or later.
• However, if you need funds to improve the asset acquired, you are not allowed to use any of the borrowed amounts. Breaching this rule may result in a contravention.

Hence, it is highly important to differentiate between maintaining, repairing and improving.