There are various SMSF rules and, in particular, Limited Recourse Borrowing rules. Limited Recourse Borrowing Arrangement (or LRBA) is an option for an SMSF borrower who has no sufficient funds in his/her SMSF account to buy a property he is eyeing to use a means of investment.
An LRBA is entered into when the fund owner/borrower draws a contract with a third-party lender to provide him a loan which he will use to pay a substantial part of the cost of purchasing the property.
For this type of loan arrangement, there are rules that the borrower should keep in mind, including:
LRBA Is Limited Only for a Single Asset
The loan is used only for acquiring a single asset. Buying a collection of assets is also permissible but the assets should be identical and must carry the same market value.
All the borrowed funds may be used for the upfront cost of the purchase and related expenses (stamp duty, loan establishment, etc.) or part of it may be allocated for other expenses, such as those incurred in maintaining or repairing the property.
Documentation Required on Borrowed Money from a Related Party
To prove full compliance to rules and regulations, the borrowing is required to submit documentation at every step of the process. In particular, monies provided/lent by a related party should be proven via documentation.
If there are no documents to show that the loan provided by a related party was provided on an arm’s length, the loan will be deemed as a contribution received by the fund. If, as a result, the total contribution exceeded the contribution cap, it may lead to significant tax consequences.
Minimum Loan Amount
There are no limits set for maximum amounts that SMSF can borrow. Third-party-lender loan amounts are subject to two things:
- The available money in the SMSF fund
- Approval of the property by the lending entity
Generally, the minimum amount for SMSF loans is $100,000 or fund leverage of 70%. A borrower can also choose from several options on periods of full-repayment with 30 years being the longest.