Borrowing to invest is a recognised strategy to grow wealth. In self managed superannuation funds (SMSFs) however this is only possible through the use of a limited recourse borrowing arrangement. Using these arrangements allows an SMSF to leverage the acquisition of new assets while at the same time limiting exposure to the fund’s existing assets.

Advantages of using a limited recourse borrowing arrangement may include:

• diversifying through instalments gives an equivalent exposure to an underlying asset while leaving remaining funds available to invest in other assets;
• future growth on assets is in a concessionally-taxed environment, with capital gains tax limited to a maximum of 15 per cent and potentially zero; and
• accumulation of assets in the superannuation environment may protect those assets in the event of bankruptcy.

How it works

Graham owns and operates a small manufacturing business. His business operates out of a factory owned by an unrelated party. The owner decides to sell the factory for a sum of $1,000,000.

Graham and his wife Lorraine have an SMSF with total fund assets of $600,000. While Graham would like to purchase the factory and continue operating his business from that site, neither he nor the SMSF has sufficient funds to purchase the property outright.

After advice, a limited recourse borrowing arrangement is used to enable the SMSF to purchase the factory. The SMSF pays a first instalment of $500,000, keeping a balance of $100,000 aside for liquidity and diversification reasons. A loan for the balance of the purchase price and costs is obtained by the SMSF trustee. The property is held on trust, with the SMSF trustee acquiring a beneficial interest in the property. The SMSF leases the factory to Graham’s business at a commercial rate and claims the interest expense and related costs as a tax deduction.

Further instalments will be paid by the SMSF at agreed intervals and the ownership of the property may be transferred to the SMSF once the loan is fully repaid.

Only certain assets may be acquired using a limited recourse borrowing arrangement and key conditions must be met. Proper advice and documentation is required to ensure the SMSF meets its obligations.


Disclaimer: The information contained in this document is given in good faith and has been prepared from information believed to be accurate and reliable. This information is of general nature only and based on Multiport’s interpretation of the present laws but no guarantee is provided. This document is not designed to be a substitute for financial or investment advice and should not be relied upon as such. Reproduction of material in this document is only permitted with approval of the author.