Borrowing and charges over assets

Borrowing is only allowed in the following limited circumstances:

  • to fund a payment to a beneficiary – in which case, the borrowing can’t exceed 90 days
  • to cover the settlement of securities transactions – and then only up to seven days
  • to acquire an asset under a ‘limited recourse borrowing arrangement’.

SMSFs are not generally allowed to provide a charge over an asset of the fund or allow fund assets to be used as security.


Restriction Exceptions Examples

Super funds are not allowed to borrow

  • short term  borrowing to pay member benefits
  • very short term borrowing to settle a securities transaction
  • approved Limited Recourse Borrowing Arrangements
  • using bank overdraft
  • using bank overdraft to fund a share purchase
  • loan to purchase residential or business property

Charges or security over assets

  • approved Limited Recourse Borrowing Arrangements
  • mortgage over a fund asset


Super gearing 

One of the best known examples of gearing (i.e. borrowing) in superannuation is an instalment warrant over shares, which is a little like buying shares on lay-by. It is typically based on two separate instalment payments. The first payment entitles your SMSF to all the dividends, distributions and franking credits paid on those shares, the second and final payment is an agreed and fixed amount that will complete the purchase of the shares. The SMSF is, however, not obliged to make the final payment and can ‘walk away’ from the arrangement.

Instalment warrants are a type of limited recourse borrowing arrangement or LRBA. These arrangements can be used to acquire other assets such as property or managed funds, effectively allowing the SMSF to gear investments via super. There is a strict set of requirements to be met.

Key Rules for an LRBA 

The key rules are:

  • The loan must be for a single asset or a collection of identical assets with the same market value. For example, a property with one title, or a number of shares in the one company would qualify. Shares from different companies would not qualify.
  • The asset must be held on trust for the SMSF by what is called a bare trust.
  • The SMSF must be able to acquire legal ownership of the asset once the loan is repaid.
  • The lender’s only rights against the super fund are limited to the asset itself, hence the term limited recourse.
  • The acquirable asset cannot be subject to any charge, other than that provided through the borrowing arrangement.
  • The borrowed money cannot be applied to improve the asset. Borrowed monies can be applied to carrying out repairs and maintenance, and other monies inside or outside your SMSF can be used to improve the asset in certain circumstances.
  • Only in very limited circumstances can an acquired asset be replaced by another acquirable asset.

Taxation Ruling ‘SMSFR 2012/1’ from the ATO elaborates on these points and provides examples of ‘repairs’, maintenance’, ‘improvements’ and ‘single acquirable asset’. The distinction between ‘repairs’, ‘maintenance’ and ‘improvements’ is quite involved, so if you are considering using monies for these purposes, you should obtain professional advice.

The borrowing arrangement (LRBA) will have the following structure:


Any borrowing arrangement that your SMSF enters into will need to satisfy the sole purpose test, and can’t be used for existing assets. Only new assets can be acquired under these arrangements – existing assets of the SMSF cannot be transferred into these arrangements.

The rules relating to the acquisition of assets from related parties apply, which means your SMSF cannot borrow money to purchase a residential investment property from a related party.

Charges over assets 

Other than through a properly structured LRBA, your SMSF cannot grant a charge, encumber or pledge an asset of the fund to any third party.


Your SMSF is not allowed to provide any form of financial assistance, including loans, to a member of the SMSF or a relative of the member.  

Loans to members (often unintentional) are a common problem in SMSFs and the ATO pays particular attention to this area. Any loan improperly made must be repaid immediately and, potentially, the fund compensated by a payment of interest at a commercial rate for the lost income for the period of the loan. As the loan is a breach of the SIS Act, the ATO may initiate compliance action against you.