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SMSF Limited Recourse Lending Memorandum
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By Ershad Ullah On August 30, 2023


SMSF Limited Recourse Lending Memorandum: Prior to 2007, the SIS (Superannuation Industry Supervision) Act 1993 prohibited a Self-Managed Superannuation Fund – SMSF (referred to as a ‘Super Fund’ in this document), from borrowing money to purchase assets.

Amendments to the SIS Act were introduced to allow Super Fund’s to invest in any kind of asset and to borrow, charging those assets so long as there is no recourse for the borrowing against the Super Fund.

SMSF Limited Recourse Lending Memorandum

New section’s 67A & 67B of the SIS Act permit a Super Fund to borrow money if :
a. The money borrowed is applied for the purchase of an asset;
b. The asset is held on trust so that the Super Fund acquires a beneficial interest;
c. The Super Fund has the right to acquire legal ownership by making payment;
d. The rights of the lender against the Super Fund for default are limited to the security

SMSF Limited Recourse Lending Memorandum: Basic Structure

The Super Fund can only borrow money to purchase an asset if it complies with the following :

The Super Fund may select any property, residential or commercial. The purchase must be an ‘arm’s length transaction’ (i.e. the property is purchased from a ‘stranger’). There is an exception for ‘business assets’ (i.e. property leased to a tenant who conducts a business in the property). In this case, the property may be purchased from a ‘related party’ of the Super Fund.

The legal title to the property must be held on trust by an independent trustee. The beneficial title to the property will be held by the Super Fund. The lenders recourse will be limited to the property, thereby providing the Super Fund absolute protection for its other assets). Certain lenders will also require a personal guarantee from all members of the Super Fund

All rents will be paid directly to the Super Fund. The Super Fund will make loan repayments to the lender.
Super Funds can deal with the property however and whenever they like, in the same way as you can deal with ‘normal’ investment properties (e.g. lease, repair, or sell). The Super Fund can pay out or reduce the mortgage at any time (subject to the terms of the relevant loan). When the mortgage is paid out in full, title to the property may be transferred to the Super Fund by the Property Trustee, or the Property Trustee may continue as registered proprietor.

It is important that the structure clearly complies with all the above requirements. Failure to do so may result in the Super Fund being declared ‘non-compliant’ within the meaning of the SIS Act.

It is also important to adhere to the lenders varying trustee requirements when establishing the legal structure. For example, certain lenders require a corporate trustee for the Super Fund, whilst the others will allow individual trustees

How Does It All Work?

There are several entities that complete the purchase/borrowing structure, the diagram on right illustrates each including their duties & responsibilities.

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