Trustees of a smsf are permitted to borrow money under limited circumstances. For instance, smsf borrowing to pay benefits to members who satisfy a condition of release is allowed, provided the loan is for a period of no more than 90 days. SMSF borrowing is also allowed for covering the settlement of security transactions so long as the period does not extend beyond 7 days.
If a the smsf trustees want to use borrowing to acquire an approved asset, and it is allowed by the trust deed, they can do so using a limited recourse borrowing arrangement. Under the limited recourse smsf borrowing arrangement, the investment asset is held in trust and ownership cannot transfer to the smsf until the fund has made the final instalment payment. The smsf loan must be structured on a limited recourse basis which means that if your smsf is unable to pay off the loan, the lender has no right to claim against the fund’s other assets.
There are limitations to the assets that trustees can use smsf borrowing to acquire. The fund can acquire property and listed securities using this method, but other assets such as artwork may be allowable.
SMSF borrowing is perhaps one of the most complex areas of smsf law, and you should always engage the services of a professional accountant with experience in this area before setting up such an arrangement.