Posted by: Tom Wood | Date: 11 May 2016
Borrowing money to buy property through an SMSF is not new, but is often not well understood.
Where an SMSF borrows to buy property, it must be done through what is known as a ‘limited recourse borrowing arrangement’.
A SMSF is prohibited from borrowing money and granting security over its assets, without using a limited recourse borrowing arrangement. The aim of a limited recourse borrowing arrangement is to allow a SMSF greater flexibility to borrow and invest, without risking the entire contents of an individual’s retirement savings.
Under a limited recourse borrowing arrangement, the SMSF is the borrower, but a separate ‘Custodian’ holds the property (on behalf of the SMSF), and the Custodian will be the party liable to the lender if the SMSF defaults under the loan. The lender should not have direct rights against the SMSF.
A simplified diagram of the structure is below.
The Custodian Trust deed outlines the legal relationship between the SMSF and the Custodian. In summary:
In practice, the documents required to give effect to this transaction are not as simple. Most lenders will also require the SMSF members to personal guarantee the loan.
There are many other complications and compliance issues with SMSF borrowing that need to be considered. For example, the property must be a ‘single’ asset, and the investment must be in accordance with an investment strategy.
You should always obtain legal, accounting and financial advice before establishing an SMSF or entering into any transaction with your SMSF. This article is intended to provide general information only, and should not be relied upon as legal advice.
Please do not hesitate to contact us should you have any questions.