Loans to buy shares

An SMSF cannot ordinarily take out loans to purchase shares. There are two exceptions to this rule where listed shares can be bought using the following borrowing arrangements:

Instalment Warrants

Instalment Warrant is a borrowing structure which allows gearing in an SMSF. These types of arrangements allow an SMSF to make an initial payment on a share and repay the debt over a period of time. The most popular providers are Instreet, CBA, NAB, Westpac and Macquarie. There are necessary internal structures such as a Bare Trust in place with these providers that meets the limited recourse borrowing requirements for it to become an SMSF compliant investment. However, Trustees should be mindful about the risks involved with these types of investments, for instance the share values and dividend yields can decrease over time which would make it hard to repay the debt.

Limited Recourse Borrowing Arrangements

An SMSF can use a Limited Recourse Borrowing Arrangement to fund the purchase of a single acquirable asset to be held in a separate trust. The lender is usually a financial institution such as a bank or a credit union. The Members or a related party of the SMSF can also loan to the Fund using a Related Party Loan borrowing arrangement.

Single acquirable asset

The loan must be for a single acquirable asset.

Section 67A (3) states an asset is an acquirable single asset, if the assets in the collection have the same market value as each other and the assets in the collection are identical to each other. For example a collection of shares of the same class in a single company.

Ownership of the acquired asset

Superannuation law requires that the asset purchased with the borrowed funds to be held in a separate trust (holding trust) to the SMSF. So accordingly, a bare trust structure should be set up and must be the legal owner of the acquired asset. However, the asset is held for the benefit of the SMSF, so the SMSF is the beneficial owner. The SMSF will receive the income generated by the acquired asset and will therefore be responsible for making loan repayments at commercial terms and at an arm’s length basis as included in the loan agreement.

An SMSF can also invest in properties with a borrowing arrangement. Please see our property investment page for more information.

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