Limited recourse borrowing arrangement

SMSF borrowing to invest in real property

Superannuation are generally prohibited from borrowing. To be able to borrow to fund an investment, the borrowing must satisfy certain conditions.

The law allows for borrowing to fund the purchase of a real property by a SMSF through a properly structured arrangement:

• The borrowing is used to acquire a property that meets the single asset definition, that is held on trust (a seperate trust commonly known as a bare trust), so that the SMSF receives a beneficial interest, and the legal ownership of the assets after repayment of the borrowing. Income earned on the property goes to the SMSF.
• The lender’s recourse in the event of the loan default is limited to the property held on trust only, and there is no recourse to the other assets of the SMSF.
• The property must be one that the SMSF is permitted to acquire and hold directly, for example, a SMSF can purchase from and lease to non-related party a residential property, or purchase from and lease to related party business real property at arms length.

A property meets the single asset definition if the property being acquired is on a single title, or the property being acquired is on more than one title and it is reasonable to conclude it is distinctly identifiable as a single asset. For example:

• an apartment and a car park on the same strata plan, on seperate title, with restriction that one cannot be transferred without the other. The apartment and the car park is a single asset.
• a factory complex sits across three titles. The factory adds considerably to the value of the land. The factory and land on three titles is a single asset.

Where the vendor will only sell more than one title together, and there is no physical or legal impediment to dealt with the titles seperately, it will not be a single asset.

Required structure and how it works

The structure requires the real property to be acquired and held in a seperate trust for the SMSF. The legal ownership of the property is held by the trustee of the seperate trust with the SMSF having the beneficial interest.

The SMSF borrows money from a lender. In return, mortgage over the property is provided to the lender as security for the borrowing. The right of the lender is limited to the real property only on loan default.

All income (e.g. rent income) are received by the SMSF directly, and expenses (e.g. expenses associated with holding and maintaining the real property), principal and interest loan repayment are paid by the SMSF directly.

The trustee of the seperate trust is normally a new company established for this purpose. The seperate trust is normally a bare trust that only holds that single property, and its role is limited to holding the title of the property. As the income derived from the property are received by the SMSF directly, and the loan repayments are paid by the SMSF to the lender directly, the seperate trust should not register for an ABN or tax file number, and does not lodge a tax return. They are instead contained within the SMSF's Annual return.

Setting up the structure

The borrowing structure should be set up prior to entering any agreement to purchase a property. This is important, as the legal owner of the property is the trustee of the bare trust, and not the trustee of the SMSF.

To have us set up the SMSF borrowing structure, download the form below, complete it and return to us.

Download form

SMSF property borrowing structure

If you have any questions, or wish to set up the structure to borrow to invest in property in your SMSF, please contact us. Where your current SMSF trust deed do not provide the requisite power to borrow or prohibits borrowing, we can update your SMSF trust deed to allow for the SMSF to borrow.