Self-managed super funds (SMSFs) have become increasingly popular in recent years, with the ability to pick and choose what the money in the SMSF is invested in – everything from Australian and international shares, property (commercial or residential) managed funds, term deposits or cash.
Market unpredictability coupled with record low interest rates and falling dividends has led to a growing appetite for diversification of assets and in particular the purchase of bricks and mortar assets within SMSFs. Traditionally, borrowing funds inside a SMSF to purchase property – otherwise known as Limited Recourse Borrowing Arrangements (LRBAs) - have been viewed less favorably to other standard investments. Despite this, appetite for LRBAs have increased across the board with the ATO’s statistics report for June 2021 showing the total value of LRBAs at $56.9 billion.
So, what is an LRBA? An LRBA allows the SMSF trustee to borrow funds from a third-party lender (such a bank) to invest in a commercial or residential asset. The borrowed amount in conjunction with capital contributed to the purchase allows the trust to hold the property ensuring the correct key legal requirements are met. An LRBA can only be used to purchase a single asset and must not be used to improve an asset’s value. The key component to the arrangement is the nature of the limited recourse; in the event the loan defaults the lender’s rights are limited only to the assets held in that trust. This draws a line in the sand by ultimately protecting the client and any other assets held in the SMSF.
For small business owners, LRBA’s provide a vehicle to help purchase a commercial premise for their business to operate out of. The concept takes advantage of utilizing the business’ cash flow to assist in the accumulation of an asset while also potentially providing a tax benefit on an ongoing basis. Consumer based clients face similar benefits, but the key difference is the individual cannot live or stay in the purchased property. Besides this, the arrangement provides a clear strategy for the consumer to diversify their asset bases and mitigate potential exposure in the market. An LRBA coupled with an overarching financial plan considering risks, goals and objectives provides the potential for a well-diversified asset base.
Unlike standard residential and commercial loans, LRBA’s are quite complicated in nature. At Partners Lending, we assist you and your clients with providing expert advice to navigate through the complexities of limited recourse borrowing. Our lending advisors are experienced and familiar with understanding the key requirements from lenders to ensure an overall smooth process. As part of our holistic approach, we can also engage with Partners Legal who provide services to ensure your clients are compliant and meet legal requirements by managing all documentation needed to set up the LRBA.
If you have clients who are considering limited recourse borrowing through a self-managed super fund, contact a lending advisor from Partners Wealth Group today on 1800 333 143.