SMSF – limited recourse borrowing
Borrowings of any sort within a Self-Managed Superannuation Fund (SMSF) are generally explicitly prohibited. Funds can however borrow in order to purchase an asset. In order to do so, certain criteria must be met:
- Section 67A of the Superannuation Industry (Supervision) Act 1993 (Cwlth) permits a borrowing arrangement if the money borrowed is applied to a ‘single acquirable asset’ and the asset is held in a holding trust (legal owner). Under such arrangements the SMSF trustee acquires a beneficial interest in the asset and the lender’s right of recourse in the default is limited to the acquirable asset held in a building trust.
- Money borrowed under limited recourse borrowing arrangements may be applied not only to acquire the single acquirable asset, but also when carrying out repairs and maintenance to the asset at the time of acquisition or at a later time.
- No amount borrowed by the SMSF trustee may be applied to improve the single acquirable asset. A breach of this rule may lead to a contravention. It is imperative to distinguish between maintaining, repairing and improving.
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