Borrowing within a self-managed super fund (SMSF) has significant risks that trustees and practitioners should consider before leveraging their superannuation savings, according to SMSF Professionals' Association of Australia (SPAA) technical director Peter Burgess.
Although limited recourse borrowing arrangements (LRBAs) can be useful to grow retirement savings, a non-complying arrangement can have dire financial consequences for trustees, Burgess warned.
Assets that the SMSF trustee would otherwise be prohibited from acquiring, such as assets that a trustee or a related party owns, generally cannot be bought under a LRBA arrangement.
Assets purchased under a LRBA arrangement also cannot generally be replaced with a different asset (which means significant property alterations cannot be made), according to Burgess.
Burgess also warned that acquiring assets via LRBAs could incur additional costs, while liquidity issues could result from having to make loan repayments from within the fund. In cases where the LRBA arrangements have not been structured correctly, they often have to be unwound at a substantial loss rather than being restructured, Burgess added.
"Used in the right circumstances and structured correctly, there can be considerable benefits associated with these borrowing strategies. But SPAA is concerned that some people are seeing this type of borrowing as a way into a property investment without realising the potential downside," he said.
