Can you borrow money against your superannuation?

Borrowing against super is generally not allowed, except for members of self-managed superannuation funds (SMSFs), where borrowing is permitted under very specific circumstances. This ensures that your super is preserved for its intended purpose, providing financial security during retirement.

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SMSFs are generally not allowed to borrow money to protect the retirement savings of their members and reduce financial risks. However, the Australian Taxation Office (ATO) has listed some specific exceptions to allow limited borrowing when necessary.

• Short-term borrowings: An SMSF can borrow for up to 90 days to meet benefit payments or to cover an outstanding surcharge liability, provided the borrowing does not exceed 10% of the fund's total assets.
• Settlement of securities transactions: Borrowing is permitted for up to seven days to settle security transactions, as long as the amount does not exceed 10% of the fund's total assets.
• Limited recourse borrowing arrangements (LRBAs): Borrowing against instalment warrants or limited recourse borrowing arrangements meeting certain conditions.

An LRBA allows a self-managed superannuation fund to borrow money to purchase a single asset, like property, or a group of identical assets with the same market value, such as shares in the same company.

These assets are held in a separate trust, ensuring that in the event of a loan default, the lender can only claim the purchased asset. This structure protects the other assets within the SMSF from being used to cover the debt.

The term "limited recourse" signifies that the lender’s recovery options are restricted solely to the asset purchased with the loan, providing additional security for the SMSF's remaining assets.

Borrowing rules for SMSFs under LRBAs

You can borrow money from your SMSF to invest in certain assets under the LRBA if you adhere to the governing rules, which include:

• You can acquire only a single asset from the borrowed amount, which means you can purchase one property or buy shares in the same company at the same time.
• You cannot make any improvement to the asset until the entire loan is repaid; however, repairing and restoration of the property is allowed.
• The acquired asset should be held in a trust until the loan is fully repaid.
• The property cannot be lived in, rented to, or purchased from any fund manager or related parties.

Since the loan is repaid by the super fund, it is important to ensure a sufficient amount is available for timely repayments. Additionally, any income or returns generated from the asset must be directed to the SMSF trustee and reinvested in the fund for retirement purposes.

As per the general guidelines, the borrowed amount can be used to purchase a single asset or a collection of similar assets. Every asset should have the same market value. The holding trust retains the legal ownership while any earnings from the acquired asset are given to the trustees.

The majority of borrowings against superannuation in Australia are used to purchase property, including commercial and residential properties. This option allows you to buy a property at a lower rate of tax when compared to buying it on your own. When the super fund goes into the pension phase, the property can be sold tax-free. If the property is sold during the accumulation phase, it is eligible for discounted capital gains tax.

Borrowing through an SMSF offers several potential benefits:

• It allows the fund to invest in assets that may otherwise be out of reach due to limited cash.
• Diversifying investments can improve the fund’s income and growth potential.
• Tax benefits may include claiming interest payments as deductions or earning franking credits from shares, though eligibility should be confirmed with an accountant or SMSF expert.

However, borrowing under an SMSF also comes with strict conditions and challenges:

• Borrowed funds can only be used to purchase a single asset or identical assets.
• Repairs and maintenance can be funded through borrowed money, but major improvements or developments, such as property extensions, are not allowed.
• Non-compliance with SMSF borrowing rules can lead to severe penalties, so it is crucial to understand and follow the regulations carefully.

Borrowing within an SMSF can be complex and involves strict compliance with ATO regulations. It’s always advisable to consult with a financial advisor or SMSF specialist to understand the rules and tax implications. You can visit the ATO website for detailed guidance on limited recourse borrowing arrangements.

Keep in mind that the rules and regulations regarding SMSFs, tax, and borrowing money can be complex, and may be updated or changed over time. If you have questions about how to borrow money from superannuation or how much can a super fund borrow, consult a financial advisor to make an informed decision and understand the implications of your decision.