Limited Recourse Borrowing - Can an SMSF Borrow for GST?

A Self-Managed Superannuation Fund (SMSF) trustee may consider a limited recourse borrowing arrangement (LRBA) to acquire a single property. A common technical question is whether an SMSF can borrow simply to pay the GST on a property acquisition.

Consider a scenario where an SMSF plans to purchase a commercial property for a GST-inclusive price of $880,000. The trustee initially expects to pay only $800,000, assuming a "going concern" exception applies to the sale. The trustee obtains a loan for $300,000 and plans to pay the remaining $500,000 from the fund, along with transfer duty, legal fees, and other fees. However, shortly before settlement, the trustee discovers the exemption will not apply and must now pay the full $880,000. This creates an $80,000 shortfall.

The extra borrowing is not just to pay the GST. The GST is embedded in the contract price, not an added-on element like a tip on a restaurant bill. The situation is that the trustee thought they were buying the property for $800,000 but are, in fact, buying it for $880,000. The extra borrowing is therefore required to make up for the shortfall in the settlement funds. So, while it appears the extra borrowing is to pay the GST, the answer to the technical question of whether the trustee can borrow the $80,000 is "yes".

However, there are practical issues to consider. First, a willing lender must be found for the $80,000 loan. Second, the initial lender of the $500,000 will likely need to consent to a second loan and mortgage, as the terms of the loan usually require the lender to consent to any second borrowing or mortgage. Lastly, the lender for the $80,000 will typically charge a higher interest rate, given the secondary status of the security.

Source: Technical Question – Limited Recourse Borrowing | SUPERCentral

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