Can I lend money to my SMSF?

Thumbnail image for Can I lend money to my SMSF?

Short answer, “Yes”.  Self Managed Superannuation Funds (SMSF) have the ability to borrow funds on “Limited Recourse Borrowing Arrangements” from financiers.  There is nothing to say that you cannot be the financier.

If you have real estate or other assets in your own name, you may be able to use them it as security for a loan from a bank, which you can then on-lend to your SMSF. 

But why would you do that?  There are a few reasons:

Most SMSF’s can borrow money from a bank but it must be on a limited recourse basis, which means that the bank’s security is limited to a charge over the asset acquired with the loan funds.  The bank does not have any recourse to any other asset owned by the fund.  Because of this limitation, the banks move to protect themselves by:

  • lowering the LVR on the loan (often only 65% of the property valuation) creating a bigger buffer should they ever need to sell the property in a forced sale situation,
  • charging higher interest to compensate them for the greater risk, and
  • they often require a guarantee from the member or they take a charge over the private assets of the member.

Borrowing personally and on-lending to the SMSF has advantages in 2 areas:

  • Interest - The loan from the bank will have a lower interest rate when lent to you, the member, than it would if it were lent to the SMSF, due to the SMSF loan being a Limited Recourse Borrowing.
  • 100% borrowing - You can often fund 100% of the purchase price of the target property by taking the 65% LVR loan within the SMSF and making up the other 35% from a borrowing that you make personally using other assets that you can pledge as security.

What rate of interest can I charge the SMSF?

All dealings between a member and the SMSF must be “at arm’s length” and on a totally commercial basis.  You could command a premium interest rate on the limited recourse loan that you make to your fund because of the security limitation; however, you are better to look at the benchmark rates charged by the major banks for SMSF loans and use those rates.

Logically, the limited recourse nature of the loan that you’ll be making to the fund is unlikely to command a rate lower than your borrowing rate.  The arrangement must be commercial if you want to successfully claim the interest costs as a tax deduction.  A situation where you borrow at one rate and lend out at a lower rate is not commercial.

How formal do we have to be?

The loan has to be a legitimate borrowing and subject to the same level of documentation as one would expect with an arm’s length loan. Formal documents, mortgage documents, regular payments of interest and possibly principal, all need to be in place. This financing arrangement is essentially just like a normal loan between a financier and the SMSF, except that you are the financier.

If you need some advice on the ability for a SMSF to borrow to fund the purchase of a property, then feel free to ring Noel on 9585 7555 or email me at noel@noelmay.com.au.  I’m sure we can help.

Previous post:

Next post: