SMSFs are generally not allowed to borrow money. There are, however, some limited exceptions including borrowing to invest under a specific type of borrowing arrangement called a ‘limited recourse borrowing arrangement’ (often abbreviated to ‘LRBA’).
Borrowing to invest under a LRBA is becoming an increasingly popular way of maximising retirement savings because it allows you to increase the amount available to invest within your SMSF. There are, a number of rules to follow and this is a transaction where we would recommend specialist advice.
With an LRBA, the lender’s recourse is limited to the asset being bought under the arrangement.
For example, if a bank lends money to your SMSF to buy a property and the fund defaults on the loan, the bank cannot take other assets of the fund. To protect themselves from this outcome, most banks require you to provide a personal guarantee for the loan (so in the event of a default, the bank would seize your personal assets given that they can’t touch your fund).
Where an SMSF borrows to invest:
All these rules cease to apply once the borrowing has been repaid and the LRBA has been wound up.
The loan under a LRBA doesn’t have to come from a bank. It may be structured with a related party (including an SMSF member) as lender to the SMSF.