The question of whether one can borrow money from their SMSF often arises among individuals who have accumulated a substantial SMSF balance and are seeking financial flexibility or investment opportunities outside of super. However, navigating the regulations surrounding SMSF lending is extremely complex and requires careful consideration.
While limited recourse borrowing arrangements (LRBA) allow for SMSFs to borrow money, SMSFs lending money is much more complicated. We discuss whether or not SMSFs can lend money to fund members, related parties and related businesses.
Can I borrow money from my SMSF?
No, you cannot. Section 65 of the SIS Act prohibits superannuation funds from providing financial assistance (including loans) to members or their relatives.
Another reason why you likely cannot borrow money from your SMSF is the sole purpose test. The sole purpose test is used to ensure SMSF funds are used for the sole purpose of providing retirement benefits to the members (or in the case of a member dying before retirement, the benefit is for their dependents).
Contravening the sole purpose test can see trustees face civil and criminal penalties, as well as the fund losing its concessional tax treatment. The sole purpose test doesn’t just apply to borrowing money, it also applies to making use of other SMSF assets, for example, staying in a beach-side property your SMSF owns.
If contravening the SIS Act and the sole purpose test weren’t reason enough to stop an SMSF lending money to members, another reason not to is that it also may increase the SMSFs concentration risk. Super laws mandate investing in a manner aligned with the best financial interest of all SMSF members — loans to members may not fall within the scope of best interests of all members.
Can my business borrow money from my SMSF?
Generally speaking, a business falls under a related party or related entity, which is prohibited from borrowing money from an SMSF by Section 65 of the SIS Act. However, there may be scenarios where it is possible to lend money from your SMSF to your business. If you’re considering lending money from an SMSF to a related business, it is essential to seek financial advice to ensure you’re doing it compliantly — this is a subject that confuses a lot of professionals, so caution is required.
A loan from an SMSF to a related business entity might be compliant, if it follows the following restrictions:
- – The business receiving the loan is a company or a trust with a corporate trustee — not a sole trader or partnership.
- – The loan amount is less than 5% of the market value of total SMSF assets (the in-house assets rule).
- – The agreement is under “arms-length” commercial terms.
- – The SMSF’s trust deed and investment strategy allows for the loan.
- – The sole purpose test is not breached by the loan.
As you can see, this is a complex area that requires stringent financial advice.
Can my SMSF borrow money?
Limited recourse borrowing arrangements make it possible for SMSFs to borrow money for investment purposes. This includes purchasing investment property, if the SMSF investment strategy allows it.
LRBAs are a type of arrangement that stop the lender from accessing the super fund’s other assets should the fund default on the investment loan. While the lender will have recourse over the security asset (the asset or property bought with the borrowed funds), it will not be able to take any of the other fund assets during recovery action.
Ready to explore the potential of property investment through your SMSF? Reach out to us today.