Can you borrow money against your superannuation?

The majority of self-managed superannuation borrowings are structured as LRBAs. Any investment procured with the funds from the super is held in a trust that the borrower may access in the future. “Limited recourse” is used as, in case of a default on the loan, the lender can seek compensation only from the asset purchased with the borrowed amount. The lender cannot seek compensation from any other assets held by the super fund.

You can borrow money from your self-managed super fund (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 returns earned from the acquired asset will go to the trustee.

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.

One of the potential advantages of borrowing against your SMSF is that it allows you to diversify, as you don’t have to use a substantial portion of the money in your super fund to purchase one asset. For example, you can use a portion of the balance to pay as a deposit for a property, and another portion as a deposit for a loan to buy shares. The remaining amount to purchase the property or shares can be borrowed from any financial lender, using separate loans as the borrowed amount can be used to purchase a single asset or a collection of similar assets.

Investing in property through your SMSF could potentially save you thousands of dollars in taxes. If you hold the property until retirement, you can possibly take advantage of no capital gains tax on the asset.

Remember 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.