Recent Developments in SMSF Borrowing and Limited Recourse Borrowing Arrangements (LRBAs)
Borrowing through a Self-Managed Superannuation Fund (SMSF) using a Limited Recourse
Borrowing Arrangement (LRBA) has been a popular strategy for those looking to invest in property
and other assets. However, recent developments in 2024 have introduced new challenges and
considerations for SMSF trustees who are either currently using or considering LRBAs. This blog will
explore these developments and provide guidance on navigating the changes.
1. Tighter Lending Conditions for LRBAs
One of the most significant developments in 2024 is the tightening of lending conditions for LRBAs.
Lenders have become more conservative in their approach, resulting in:
- Higher Deposit Requirements: Many lenders now require SMSFs to provide a higher
deposit, often 40% or more of the property’s value, compared to previous years. - Stricter Loan Serviceability Tests: Lenders are applying more stringent tests to ensure SMSFs
can service the loan, taking into account not only the rental income from the property but
also the fund's overall cash flow and existing obligations. - Reduced Loan-to-Value Ratios (LVRs): LVRs have been reduced, meaning that SMSFs can
borrow a smaller percentage of the property’s value, requiring a larger upfront investment.
These changes mean that SMSF trustees must carefully assess their fund's financial position and
consider whether borrowing through an LRBA is still a viable strategy.
2. Regulatory Scrutiny and Compliance
The Australian Taxation Office (ATO) and other regulatory bodies have increased their scrutiny of
LRBAs in SMSFs, focusing on compliance with superannuation laws. Key areas of concern include:
- Sole Purpose Test: The ATO is closely examining whether LRBAs are being used solely for the
purpose of providing retirement benefits to members, rather than for personal or
immediate financial gain. - Arm’s Length Transactions: Transactions involving LRBAs must be conducted on an arm’s
length basis, meaning that all dealings, including the interest rate, must be comparable to
what would be offered by an unrelated party. - Non-Arm’s Length Income (NALI): If the ATO determines that an LRBA transaction is not at
arm’s length, the income generated from that investment may be treated as NALI, which is
taxed at the highest marginal rate.
Given the heightened scrutiny, SMSF trustees must ensure that all LRBA transactions are compliant
and well-documented to avoid potential penalties.
3. Impact of Rising Interest Rates
The rising interest rate environment in 2024 has significantly impacted SMSFs with existing LRBAs.
Higher interest rates increase the cost of servicing the loan, which can strain the fund’s cash flow
and affect its ability to meet other obligations.
To manage the impact of rising rates, SMSF trustees should consider:
- Refinancing Options: Exploring fixed-rate loans or renegotiating loan terms with the lender
to secure more favourable rates. - Reviewing Cash Flow: Conducting a thorough review of the SMSF’s cash flow to ensure that
it can comfortably meet the higher loan repayments without compromising its ability to fund
members’ retirement benefits. - Considering Early Loan Repayment: If the fund has sufficient liquidity, early repayment of
the loan or additional contributions towards the loan principal can reduce the impact of
rising interest rates.
Effective management of interest rate risk is crucial to maintaining the financial health of the SMSF.
4. Alternatives to LRBAs
Given the challenges associated with LRBAs, some SMSF trustees may consider alternative strategies
for investing in property or other assets. These alternatives include:
- Direct Property Investment Without Borrowing: Investing in property directly through the
SMSF without using borrowed funds, particularly if the fund has sufficient capital to do so. - Property Syndicates or Unit Trusts: Participating in property syndicates or unit trusts that
pool funds from multiple investors, including SMSFs, to invest in larger property projects. - Listed Property Trusts: Investing in listed property trusts, which provide exposure to the property market without the need for direct ownership or borrowing.
These alternatives may offer a more flexible and lower-risk approach to property investment for
SMSFs.
5. Importance of Professional Advice
Given the complexity of LRBAs and the recent developments in this area, seeking professional advice
is essential. A qualified SMSF specialist can help trustees navigate the regulatory landscape, assess
the viability of LRBAs, and explore alternative investment strategies.
Conclusion
The recent developments in SMSF borrowing and Limited Recourse Borrowing Arrangements in 2024
present both challenges and opportunities for SMSF trustees. Understanding these changes and
adapting your strategy is crucial to maintaining compliance and achieving your retirement goals.
If you need assistance with managing an existing LRBA or considering whether borrowing is right for
your SMSF, our team of SMSF experts is here to help. Contact us today for tailored advice and
support.
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