For quite some time now SMSFs have been able to, in restricted circumstances, use borrowed money to purchase investments, known as Limited recourse borrowing arrangements (LRBA).
The restrictions on the borrowing include;
- The loan must be made on a limited recourse basis. This mean the lender can only take security over the asset being purchased.
- The asset must be held in trust for the SMSF whilst the loan is in place.
- The asset must be a single acquirable asset.
- Any related party loans must be made on an arms-length basis.
For the most part LRBAs are used to purchase property, either commercial or residential. LRBAs enable SMSFs that don't have sufficient capital to purchase property outright to make the investment or that would like to only use part of their capital for property acquisition the flexibility to diversify assets.