How to Borrow With A SMSF


Why Borrow with a SMSF?

Super funds are allowed to borrow money in order to invest but usually you can only take advantage of this in a SMSF. This allows your SMSF to purchase investments it otherwise could not afford (particularly useful when investing in property). Another advantage is that SMSFs enjoy tax benefits that can significantly increase the returns you receive from your investment (when compared with owning the asset personally). The loan repayments are made pre-tax, investment income is taxed concessionally and if the asset is sold in retirement you don’t pay Capital Gains Tax.


How does it work?

Your SMSF borrows funds through a Bare Trust structure from a lender to acquire an asset. The SMSF will not own the asset until the loan is fully repaid. Instead, the Corporate Trustee of the Bare Trust holds legal ownership on behalf of the fund. After the loan is repaid the asset can then be transferred to the SMSF. It is important to set up the SMSF first, including the Bare Trust structure. All transactions take place in the SMSF as the Bare Trust and Corporate Trustee exist only as legal entities for holding the property.


Borrowing to invest in Property

When borrowing for property the SMSF takes out a loan and pays cash for the deposit, legal costs and stamp duty. The SMSF will continue to pay off the loan through super contributions, rental payments and other income into the fund. Income and expenses for the property are paid by the fund.

Residential properties must be leased to an unrelated party and cannot be leased to yourself or family. On the other hand, commercial property is permitted to be leased to both unrelated and related parties (such as your family business).


Who can lend to a SMSF?

Anyone who can ordinarily lend money, such as financial institutions, can lend to your SMSF. Often financial institutions will require a significant deposit when lending to a SMSF because it must be a limited recourse loan. These limits means the bank does not have recourse on the SMSF should the loan default, and so the banks usually ask for a personal guarantee over the property from the Trustees.

As Trustee you can also lend your own money to your SMSF under certain regulations.

We recommend you speak with a financial planner before taking out a loan. Contact us for help.


What can the SMSF purchase with a loan?

The SMSF can purchase any allowable investment with a loan, including:

  • – Direct property
  • – Direct shares
  • – Hedge funds
  • – Managed funds
  • – Collectibles

Only a single asset or collection of identical assets (e.g. 1000 ANZ shares) can be acquired under a single borrowing arrangement. Examples include a single property title, 1000 ANZ shares, or an equity fund.

You cannot have multiple property titles under one loan arrangement, even when those properties are managed as a block.

You also can’t use your SMSF to purchase a property you already own – it must be from an unrelated third party.


What are the limitations?

– All SMSFs must borrow with a limited recourse loan. This means that only the acquired asset can be used as security for the loan. Often lenders will require a 30-50% cash deposit from the SMSF to offset the risk.

– While paying off a loan for a property, your SMSF can perform repairs or maintenance on the building but is not permitted to borrow to make improvements such as an extension, pergola, shed, swimming pool etc. SMSFs can ONLY use existing funds – not borrowed – or funds from external sources to finance improvements. You also will not be able to subdivide or otherwise develop a property.

– If the property increases in value, you can’t utilise equity in the property to buy more property. This is an important consideration as your equity gains are “locked inside” the fund and can’t be used as leverage.

– The property must be purchased under a single title – you can’t buy two properties in a single sale.

– You cannot have multiple assets under one loan arrangement (unless they are a collection of identical assets, such as shares from one company). As such, you cannot have multiple property titles under one loan agreement, even if they are managed as a block.

– Placing most of your super into one investment can be a disadvantage. You are at risk of losing much of your super if the investment isn’t profitable.


Can I refinance the loan?

You are permitted to refinance a loan arrangement and can include expenses such as stamp duty within the loan.


Strategies for your SMSF

Borrowing with your SMSF gives you the opportunity to take advantage of strategies such as:

  • Investing in commercial or residential property that may have high long term yield
  • Leasing your business premises from your SMSF
  • Purchasing a property to live in during retirement
  • Transfer of investment property into super

Contact us to find out how you can implement these strategies.


The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.