A Limited Recourse Borrowing Arrangement (LRBA) is entered into by the Trustee or Trustees of a self-managed superannuation fund (SMSF) to purchase an investment for the SMSF. The asset is held in a separate trust to the SMSF trust and the loan is tied to the asset purchased and not to the entirety of the assets held in the SMSF – that’s the meaning of ‘limited recourse’. This goes some way to protecting the other assets held in the SMSF because in the event of a loan default, the lender may only seek to recover the specific asset acquired under the LRBA.
The interest is generally similar to a variable home loan rate and there are good resources to help you work out which lender may suit you best, such as Canstar .
Your financial adviser may suggest a LRBA to you but be aware that they are most suited to those with a significant super balance and experience in financial matters. Limited recourse borrowing may involve a package which includes an allocation to property, shares and warrants and it can get complicated – a good financial adviser is important even if you believe you have the necessary skills to traverse the complicated PDS.
A good financial adviser will understand the Superannuation Industry (Supervision) Act (SISA) and the conditions, amendments and in-house asset rules set out in SISA. If the SISA conditions are not met, this will result in a contravention of super laws which may have civil or criminal consequences. The importance of a good financial adviser cannot be over stated.
LRB arrangements can also be costly so make sure you look at the establishment and ongoing fees and other costs (including commission) plus any additional payments you may be required to pay from the SMSF (such annual accounting costs as well as insurance and home maintenance). Work out what those costs will amount to over the course of the loan and ascertain if the SMSF can pay those costs now and into the future – such as when you transition into pension phase. Do all those costs, when compared to the likely value of the asset purchased, make this a worthwhile exercise?
The benefits on a LRBA
If you feel like a LRBA might be right for you, please contact us . We are happy to discuss your particular circumstance and go through this option in greater detail.
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