Limited Recourse Borrowing Arrangement is a strategic tool available to SMSFs.
In retirement planning options, Self-Managed Super Funds (SMSFs) stand out as a powerful tool. These funds allow you to take charge of your financial destiny, offering unparalleled flexibility and control. Let’s delve into the strategic gem within SMSFs: Limited Recourse Borrowing Arrangements (LRBAs).
The Strategic Edge of Limited Recourse Borrowing Arrangements (LRBAs)
One of the most strategic tools available to SMSFs is the Limited Recourse Borrowing Arrangement (LRBA). An LRBA is a specific borrowing arrangement within an SMSF. Here’s what you need to know:
What Is an LRBA?
An LRBA allows your SMSF to borrow money to acquire a single asset (or a collection of identical assets) to be held in a separate trust. Common assets include residential or commercial properties.
How Does It Work?
The SMSF trustee borrows funds from a third-party lender (usually a 2nd tier bank or non-conforming lender). The borrowed amount is used to purchase the asset.
In the event of a borrower default, the lender’s recourse is limited to the asset itself (hence the term “limited recourse”).
Key Considerations
Genuine Borrowing: Proper documentation is crucial to prove that the borrowed money was genuinely used to acquire the asset.
Related-Party Lending: While related parties can lend to the SMSF, terms must be consistent with arm’s-length transactions.
Compliance: SMSFs must continue to comply with other super laws (e.g., sole purpose test, investment restrictions).
Benefits of LRBAs
LRBAs allow SMSFs to invest in property directly and allow the Trustees to diversify their investments. Also SMSFs can implement tax strategies tailored to their situation, and potential tax efficiency to be gained.
Furthermore, Trustees have direct control over the asset.
Key Takeouts
Setting up an SMSF with the protections of LRBA can provide investment flexibility and control. However, it’s essential to understand the rules, seek professional advice, and ensure compliance. SMSFs come with responsibilities, but they also offer unique opportunities for savvy investors.
If you are new to SMSF, our team of specialist professionals can guide you to ensure that your SMSF is set up correctly, and provide advice about securing loans to buy commercial or residential real estate.
If you have an existing SMSF, you may qualify for our High Net-worth Client lower interest rates for real estate acquisition.
Talk to us today.
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