Borrowing to buy shares

Residential property

Business Premise

Getting Advice

Chapter 6 - Limited recourse borrowing

A limited recourse borrowing arrangement allows the trustee of the SMSF to take out a loan from a third party lender to purchase a single acquirable asset (or a collection of identical assets) to be held in a special purpose trust. The limited recourse aspect of the loan means that the lender’s rights are limited to the asset held in the special purpose trust. The lender will have no recourse against any of the other assets held within the SMSF.



The law regarding SMSF borrowings changed on 7 July 2010. Arrangements entered into before this date are controlled by the former sub-section 67(4A) of the Superannuation Industry (Supervision) Act 1993, and arrangements entered into after this date are controlled by the new sections 67A and 67B of this Act. Borrowings may be refinanced, and a refinancing may, depending on its detail, create a new borrowing that brings the arrangement within the new rules. Instalment trust arrangements are now known as “limited recourse borrowing arrangements”.

SMSFs have always had a limited ability to borrow. However, the power to borrow was so limited that few people did it. That changed in July 2010, when the Superannuation Industry (Supervision) Amendment Bill 2010 became law.

The old rules (ie section 67(4A)) apply to borrowings entered into before 7 July 2010. The new rules (ie section 67A and 67B) apply to borrowings entered into after 7 July 2010, to restrict the form of the borrowings as follows:

  1. single acquirable asset – only one asset, or set of identical assets (example a parcel of shares in a listed company, listed trust, or other assets that have economically identical qualities) is permitted in each trust arrangement. This asset must be dealt with as a single asset (for example, a parcel of shares cannot be sold gradually over time. It must all be bought and/or sold are once). This rule is very restrictive for shares and similar securities but has no real effect for real estate.

  2. capital improvements – borrowings cannot improve the asset, but can be used to maintain or repair the asset to maintain its functional value. This is particularly relevant to real estate. For example, an SMSF cannot borrow to buy an old run down building and then borrow again to knock it down and build a new one. But a SMSF can borrow to repair or maintain a property to maintain its functional value;

  3. lender’s recourse – this must be limited to the particular asset. This means that a lender can only take security over the assets being financed;

Borrowing to buy shares


The new rules are particularly restrictive for shares. They do not allow a parcel of shares in different companies to be held under the one instalment arrangement, and do not allow a progressive sell down of shares. For this reason, it is quite rare for self managed superannuation fund to borrow to buy shares.

Residential property


Borrowing to purchase residential property is much more common. Consider a common example: a forty-five year old couple have, say, $200,000 in super. They are concerned about their long term retirement prospects and, although they are in the 37% tax bracket and have statistically high incomes, they are cash poor because of the high costs of feeding, housing, educating and “holidaying” their family.

The couple decides to establish a SMSF, transfer the existing $200,000 of benefits in, pay future contributions in, and then borrow say $400,000 to complete the purchase of a $600,000 property. The property is then rented out, with the rent covering the outgoings and the interest, with a bit of help from their contributions.

The expected capital gains drive this investment, and the key is to not realise the capital gains until the SMSF converts to pension mode, once the couple have each turned 60. Doing this means that the bulk of the return is capital gains tax free.

Business premises


Gearing an SMSF can also be a tax effective way to own business premises. The premises are bought using a geared SMSF arrangement and then leased back on an arm’s length basis to the business.

However, here the loss of the active asset exemption for business premises held by a SMSF has to be considered, which makes the arrangement less attractive from a tax point of view than may have been first thought: SMSFs are not eligible for this exemption.

Getting advice


Borrowing within an SMSF is one area where you should really not go it alone. Professional advice is imperative, as the consequences of making an administrative error can be substantial. Indeed, if not done properly, any advantage of a geared investment may be completely lost.

5. Investments in a SMSF
7. Getting money out of super