There are laws restricting the use of SMSF’s to borrow money, and restricting the recourse of the lender in the event that the trust cannot meet its repayment obligations, a basic outline of the rules a SMSF trust must follow in order to borrow money, is as follows:
The SMSF borrowing must be used to finance or refinance the acquisition of a “single acquirable asset” (the residential or commercial investment property) which the SMSF trustee is not otherwise prohibited from acquiring by the SIS Act or any other law. The borrowing may also be used to meet expenses incurred in connection with the borrowing or acquisition (such as conveyancing fees, stamp duty, brokerage or loan establishment costs), or in maintaining or repairing the asset. However, the borrowing cannot be used to meet expenses incurred in improving the asset.
The asset is held in trust (the security trust), also known as a bare trust, so that the SMSF trustee acquires a beneficial interest in the asset.
The SMSF trustee has a right to acquire legal ownership of the asset by making one or more payments after acquiring the beneficial interest in the asset.
The rights of the lender or any other person against the SMSF trustee in connection with any default on the borrowing are limited to rights relating to the asset. This protects the other assets of the SMSF. This limitation applies to any rights of recovery that the security custodian and any director of the SMSF trustee may have against the SMSF as a result of their guarantees and the mortgage.
If, under the arrangement, the SMSF trustee has a right relating to the asset (other than the right to acquire legal ownership) the rights of the lender or any other person against the SMSF trustee in connection with or as a result of the SMSF trustee’s exercise of their rights are limited to rights relating to the asset.
The asset is not subject to any charge including a mortgage, lien or other encumbrance.
Each SMSF borrowing arrangement can only be for a “single acquirable asset”. In the case of strata title or subdivisions, each title is considered a separate asset.
SMSF borrowing – are there any restrictions?
There are restrictions on SMSF lending which prevent some transactions from taking place. For example:
Construction loans are not available. However the SMSF can pay for renovations out of its own funds, but cannot use the borrowed additional funds for this purpose.
Buying a property in your SMSF that you intend to live in (owner occupied business premises are acceptable).
Selling a residential property to your SMSF, that you or a related party owns (commercial property is acceptable).
You may also wish to speak to your accountant or financial adviser to find out if your intended SMSF transaction complies with lender rules and government regulations.
The content of this page provides general advice about SMSF borrowing processes, SMSF home loans, lender requirements and our service. It does not take into consideration your specific personal or financial circumstances, needs and objectives and is not a specific recommendation. We recommend that you seek independent financial advice before borrowing money to invest via your SMSF.