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Limited Recourse Borrowings (LRB)

Generally superannuation funds are prohibited from borrowing. However, it has been possible for the last few years for SMSFs to borrow to buy assets such as real property by using LRB (sometimes referred to as instalment warrants). The provisions which allow SMSFs to enter into a LRB can be quite onerous.

For example, if the fund was to buy a property, which happens to comprise two titles, the fund would need two separate LRB arrangements in place. Another restriction is that the fund can use the LRB to do repairs
to a property, but not to do improvements.

Potential investors should also consider whether having the gearing in the SMSF, which is a low tax environment, is the best outcome. There are other ways of accessing the cash in the SMSF and having the gearing outside of the fund. Examples might be purchase of the property as tenants in common with the members, or setting up a unit trust to purchase the property and the members gear their units in the unit trust. As with any issues to do with SMSFs, the regulations are complex and must be strictly adhered to.

This is one area where you should definitely get professional advice before proceeding.

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