SMSF Limited Recourse Borrowing Arrangements

 

Although Self Managed Superannuation Funds (SMSFs) are normally not permitted to borrow, there are some important exceptions to this rule. One such exception, which has received plenty of attention in recent times, is an “SMSF limited recourse borrowing arrangement”, which gets its name because the rights of the lender against the SMSF trustee are limited if the SMSF defaults on the loan.

 

While it is true, used in the right circumstances, this strategy can assist members to grow their retirement savings, there are many risks and issues that should be considered before embarking on this strategy.

 

For example, careful planning is needed to ensure superannuation contributions and the fund’s investment income is sufficient to meet the loan repayments and other existing and prospective liabilities of the SMSF as they fall due. There may also be additional costs associated with acquiring an asset under a limited recourse borrowing arrangement that otherwise do not apply.

 

SMSF limited recourse borrowing arrangements that do not comply with the law can cause considerable problems for SMSFs and some trustees may not be aware of the serious consequences.  Some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified and can result in the SMSF needing to sell the property at a substantial loss.

 

Given the growing focus on these strategies at seminars and in the media, and the serious consequences if the rules are not followed, we have prepared the enclosed “SMSF limited recourse borrowing fact sheet” to help you understand the benefits and risks associated with this strategy.

 

If you would like to learn more about SMSF limited recourse borrowing arrangements, and the benefits and risks specific to your circumstance, please contact Selwyn Favish at this office.

 

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