What is an SMSF limited recourse borrowing arrangement?
An SMSF limited recourse borrowing arrangement typically involves an SMSF taking out a loan from a third party lender or from a related party, such as a member of the fund. The SMSF then uses the loan, together with its own available funds, to purchase a single asset (normally a residential or commercial property) that is held in a separate trust (the Bare Trust or Property Trust).
The SMSF trustee acquires a beneficial interest in the asset with the trustee of the Bare Trust being the legal owner of the asset. The SMSF trustee has a right to acquire legal ownership of the asset by making one or more payments to repay the loan.
If the SMSF defaults on the loan, the lender's rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF. The lender will normally require a personal guarantee from the SMSF members (who cannot access the other SMSF assets if the guarantee is called upon).
Any investment income received from the asset goes to the SMSF, which pays all expenses and enters into all contracts (other than the purchase contract). The Bare Trust does not receive any income or pay any expenses, does not have a Tax File Number or ABN and does not have a bank account. Read more…