Is a Limited Recourse Borrowing Arrangement right for my SMSF?

Editorial Team • December 17, 2018

We borrow all the time to acquire assets; you may borrow to purchase a home or investment property which usually involves a mortgage, you may borrow from a finance company for a car which uses the car as collateral, you may take out a margin loan to purchase equities. These are just some examples but there is another: Limited Recourse Borrowing (LRB).

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

  1. Firstly, your SMSF may be able to purchase (via borrowing) an asset you may not have otherwise been able to afford. Although your SMSF is not the legal owner of the asset (it’s a separate trust), your SMSF acquires a beneficial interest and is entitled to receive all of the income derived from the asset. Note, you SMSF is only entitled to a 33.3% discount on the capital gain when the asset is sold.
  2. Investment income received by your SMSF is taxed at the concessional superannuation rates (in accumulation phase that is up to 15% and likely substantially less than your marginal tax rate which is the rate you would likely pay if the asset was held in your own name).
  3. It enables you to diversify your SMSF investments.
  4. It protects the other assets in your SMSF as the borrowing in tied to the asset purchased under the LRBA.
  5. You may be able to use your concessional superannuation contributions to pay down the loan faster.

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.

The information in this article is general guidance only. Consider your own circumstances, and obtain your own advice, before relying on this information. Contact BDH Leaders for further information.

ATO take “Gloves off” on overseas income

By Editorial Team • September 6, 2019
How you are taxed and what you are taxed on depends on your residency status for tax purposes. As tax residency can be different to your general residency status it’s important to seek clarification. The residency tests don’t necessarily work on ‘common sense.’ For tax purposes: Australian resident – taxed on worldwide income including money earned overseas (such as employment […] The post ATO take “Gloves off” on overseas income appeared first on BDH Leaders.

Tax Time: Are you in the ATO’s sights?

By Editorial Team • June 16, 2019
What’s new Live reporting through Single touch payroll Single touch payroll (STP) reporting has changed the way businesses report salary and wages, PAYG withholding and superannuation contribution information to the ATO. For the 2018-19 financial year, only businesses with 20 or more employees were required to use STP. From 1 July 2019, all businesses will need to use STP although […] The post Tax Time: Are you in the ATO’s sights? appeared first on BDH Leaders.

What you can expect after the Election

By Editorial Team • May 3, 2019
Budget 2019-20: The pre-election announcements that are now law The Federal Budget announced a series of measures, some of which were legislated before the election was called. Extension and increase to the instant asset write-off The popular instant asset write-off for small business has been extended and increased. The new laws: increase the threshold below which small business entities can […] The post What you can expect after the Election appeared first on BDH Leaders.

Borrowing in the post Banking Royal Commission era

By Editorial Team • December 17, 2018
The fallout from the Banking Royal Commission is reverberating across the economy. Banks are simplifying their business models, cutting costs and tightening their lending practices. Boards are streamlining their product offerings in the wake of some pretty astounding findings by the Commission. The impact of the Banking Royal Commission is not only being felt by banks. The property markets continue […] The post Borrowing in the post Banking Royal Commission era appeared first on BDH Leaders.

Building wealth with stocks, bonds and funds

By Editorial Team • August 21, 2018
Investing in revenue-producing assets can be confusing. There is a lot of financial jargon to wade through and it’s often not easy to decide which asset best suits your needs and financial goals. In this article we will simplify stocks, bonds and funds. Stocks Stock (equity) is when you purchase shares in a company. The price of a share, purchased […] The post Building wealth with stocks, bonds and funds appeared first on BDH Leaders.

The rise and rise of investing ethically

By Editorial Team • August 21, 2018
Making an investment decision is not always based on the possible return you may receive from that investment. An increasing number of people are basing their choice of fund, or company, on issues around social responsibility, sustainability and corporate governance. In Australia, ethical investing started in earnest in 1986 with the launch of Australian Ethical, followed in 1994 by Hunter […] The post The rise and rise of investing ethically appeared first on BDH Leaders.

Let me be Frank

By Editorial Team • August 21, 2018
What is a Franking Credit? You have probably seen this phrase on tax statements provided to you by a company you invest in but what does it actually mean? Franking Credits are the means whereby Australian companies can give credit for tax paid at the company level to their shareholders, which can then be used by the shareholder to avoid […] The post Let me be Frank appeared first on BDH Leaders.

IPOs vs ICOs – what’s right for you?

By Editorial Team • August 21, 2018
There are significant differences between an initial public offering (IPO) and an initial coin offering (ICO) and before you invest in either option, it is important to understand those differences and the risks associated with each. What is an IPO An IPO is the first sale of a company’s stock issued to the public via a stock exchange, usually to […] The post IPOs vs ICOs – what’s right for you? appeared first on BDH Leaders.

Is your business about to have a growth spurt (and are you ready)?

By Editorial Team • August 21, 2018
Besides the launch phase, growth spurts are the second riskiest time for many businesses. An unexpectedly successful marketing campaign, a sudden change in consumer needs, a ‘hot’ market for a particular type of product or service – any of these things can cause challenges for your business. The question is – will your business cope?   Consider the following points […] The post Is your business about to have a growth spurt (and are you ready)? appeared first on BDH Leaders.

How not to panic when the stock market crashes

By Editorial Team • July 26, 2018
Stock market crashes are a regular occurrence A stock market crash is when a stock index (the ASX, S&P 500, the NASDAQ or the Dow Jones) drops severely in a short space of time. A correction is more gradual and occurs when the market drops 10 percent from its 52-week high. Since 1900 there have been at least 29 stock […] The post How not to panic when the stock market crashes appeared first on BDH Leaders.
More Posts