Masterclass SMSF – Can a limited borrowing arrangement be used to purchase assets other than direct property? Assuming that the investment strategy allows for such investments and that the risks are understood

 Statistics - SMSFs from ATO Dec 2011My understanding is that it is possible – for example can a fund borrow to buy shares in an unrelated private company? Are there any rules that should be adhered to when it comes to private equity investments? 

Limited borrowing provisions were not specifically made for direct property. As long as the asset is one that is legally allowable inside of Superannuation (without borrowings) and you follow the limited recourse borrowing rules (one single acquirable asset etc.) then I can’t see how it could be disallowed. In general, any unlisted asset purchases must be clear of related party interactions. As the asset is not listed, the fund needs to make sure that the valuation is solid. This may be a difficult thing to do, if the unlisted shares or issues are not widely available or have a limited market. You also need to make sure that any unlisted assets don’t have related party relationships. Purchasing these assets from yourself is not allowable.

Section 67A of SISA is a good place to start. A trustee may borrow to acquire a single acquirable asset or a collection of identical assets acquired at the same market value. Technically a trustee should be able to acquire a parcel of shares in an unlisted company or units in a unit trust provided they were identical (ie the same class of shares of units), they were acquired at the same price, and were acquired from an unrelated party (unless satisfying 13.22C). From a practical perspective it may be difficult to find a lender willing to lend on such assets, unless the lender is a related lender. Other issues to consider are the SMSFs investment strategy, the acquisition of assets from related parties prohibition, and in-house asset restrictions. Having a SMSF borrow to purchase units in a 13.22C trust or company might be an option.

Further information can be read at the recent Regulation SMSFR 2012/1 – Limited recourse borrowing arrangements. Here is a link:


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