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Top 10 must-knows for SMSF borrowing

By Tim Mackay, Quantum Financial · March 15 2016

Top 10 must-knows for SMSF borrowing

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By Tim Mackay, Quantum Financial · March 15 2016

Limited recourse borrowing arrangements can cost you dearly in time and tax if you are unaware of some key strategies and serious pitfalls.

As a former property analyst, I believe that investing in property as part of a well-diversified SMSF portfolio can be a suitable strategy. Provided this fits within your investment strategy, your trust deed and you can afford it, it can be a reasonably simple strategy to execute.


Tip 1: Educate yourself

LRBAs in your SMSF are incredibly detailed and complex processes, and a multitude of small and seemingly inconsequential mistakes can lead to disproportionate additional stamp duty and penalties further down the track.


Don’t ever fall into the trap of thinking that you know everything about LRBAs. Keep developing your knowledge over time and make sure you keep up to date with any potential developments in this complex area.

A great place to start your LRBA education is by searching ‘ATO SMSFR 2012/1’ on Google.

Tip 2: Get your structuring right

Understand the role of and relationship between your bare trust, corporate trustee, SMSF, and other legal structures (eg, unit trust) and the difference between legal and beneficial ownership.

Once the optimal structuring for your LRBA is in place, ensure the legal paperwork reflects the structures. Check that the property acquired and the LRBA loans are in the correct entity name.

If you invest in an additional leveraged property, ensure you establish a new bare trust.

Tip 3: Don’t over-extend yourself

As part of your investment strategy, determine a maximum amount that you are willing to borrow. Model this across higher levels of interest in the coming years to ensure this strategy can stand the test of time. Don’t over-extend yourself financially, even if the bank is willing to lend you more.

Tip 4: Fix your mistakes

We can all make mistakes at some time, some are small and some are large. So too within your SMSF LRBA.

As soon as you identify a problem, develop a strategy to remedy it. If it is a serious issue communicate with the ATO about the problem, your proposed solution and the change to your processes to ensure it won’t ever happen again.

Don’t be afraid of the ATO – believe it or not if you communicate openly with them they can be quite helpful.

Tip 5: Get professional advice

Well before you commit to acquiring a leveraged property in your SMSF, seek expert, trusted SMSF and property advice. Too often we have been approached by panicked SMSF property investors who tell us they need to close the financing arrangement for their LRBA by the end of the week and could we please give them advice as the bank lender requires it.

This is not structured financial advice given in your best interests – this is going through the motions to ensure the bank’s compliance checklist can be ticked off.

To avoid this type of situation, employ an SMSF expert who can co-ordinate and manages the LRBA process for you from start to finish. It is an incredibly complex process and small mistakes can lead to additional stamp duty and penalties. By appointing one expert champion to manage the process you minimise your risks.


Trap 1: LRBA investment allowed?

Before investing, do significant research and homework to ensure LRBA investing is allowed within your SMSF.

Check to see if LRBA and leveraged property investment is allowed by both your investment strategy and your trust deed. Read them both or have a trusted expert give you their professional opinion on this matter.

If either or both don’t allow it, have this legal documentation updated.

Trap 2: Falling for the high-pressure sale

There is much money to be made by unqualified spruikers selling properties to SMSF investors. Don’t become one of their growing number of poor victims.

Avoid the high-pressure, glossy sales pitch presented at seemingly professional seminars. Before you commit to anything, pay for an independent property valuation; the peace of mind this will give you is well worth it.

Trap 3: Not knowing the development rules

Be mindful that using borrowed funds to improve (or develop) a property is a no-no. Ensure you have a clear understanding of what is meant by repair, maintenance and improvement before you do any work on the property and always seek professional advice.

Trap 4: Keep financials above board

Don’t try to cut corners on your financials. Pay market value for the property and pay markets rates for the interest.

Avoid the spruikers who continue to push the lure of the zero-interest loan strategies. If you’ve got one already in place, speak to an expert about correcting it. The ATO has quite rightly clamped down on this strategy and the fines can be horrendous.

Trap 5: Having no exit strategy

Ensure you have a clear exit strategy for the LRBA and the property investment. Understand the tax likely implications upon sale (depending on your age and retirement status) and the mechanics of how the LRBA will be paid off.

Strategically, the majority of LRBAs are wound up prior to retirement, which intuitively makes sense. This is when the tax effectiveness of an LRBA strategy is lost.

Follow the tips, avoid the traps

When executed well, an LRBA within your SMSF can be a wonderfully effective investing strategy. However, having trusted, expert, professional advice is incredibly important. Not following these basic tips or falling into one of these traps can mean your LRBA can cost you dearly with double or even triple stamp duty, confusion over ownership and SMSF audit problems.

Tim Mackay, principal, Quantum Financial 

Top 10 must-knows for SMSF borrowing
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