Limited Recourse Borrowing Arrangements (LRBA)
Borrowing in an SMSF is not permitted under the Superannuation Industry (Supervision) Act 1993 (SIS Act) other than under a limited recourse borrowing arrangement (LRBA). A borrowing is permitted in this form under legislation providing it is for the purpose of acquiring or repairing an asset. The LRBA structure, as suggested by its name limits the recourse from the bank or another creditor to the asset being held under this structure thus protecting all the other assets held in the super fund. Whilst property is the most common asset class that funds borrow to acquire, it is still possible to borrow to acquire a distinct parcel of shares or even invest in a managed fund.
Other than ensuring that the documentation to establish the structure is drafted correctly, it is important to ensure the ‘single acquirable asset rule’ is complied with at all times.
In relation to the purchase of property, this implies that the property is required to be held under one title only. An example of this is if the fund wanted to acquire a group of units each individual unit would have its own title. To ensure the fund complies with the borrowing rules it is required to establish an LRBA for each unit it acquires. In relation to purchasing shares the shares must be completely identical in nature, purchased on the same day and at the same price. If there was a desire to dispose of the shares they must all be sold in tact as a single parcel.
Assuming the funds trust deed allows for a borrowing, serious consideration should be given to whether borrowing is the right things to do. In addition to the costs involved in establishing the structure, consideration needs to be given to the ability to service the loan. What happens if the fund is suddenly not receiving any income from the asset? If borrowing for a property how will the fund service the loan if the property is vacant? If member contributions cease for whatever reason, will the fund be able to still service the loan? What are the age of the members, are they likely to be requesting an income stream in the near future? If so how will this be paid if no income is being generated by the fund?
There are a number of rules surrounding the use of LRBA borrowing structure. Falling foul of the rules can have dire consequences for the fund so it is important to ensure you seek guidance from experts in the field when contemplating a borrowing.