Knowing where to invest your money for retirement is important in achieving financial security. Investing and contributing to a self managed super fund (SMSF) may be the key to financial success since you are basically pooling your money with other members in order to make larger investments that may yield better returns. While the average account balance recorded in June of 2015 was $561,906, the average SMSF balance generally averages in the hundreds of millions. If you don't have sufficient funds, you can always borrow on an SMSF through a LRBA note.
The Basics of LRBA Notes
LRBA notes, also known as limited recourse borrowing arrangement notes, are for trustees who are interested in borrowing on the SMSF in order to diversify their investment. The loan from the LRBA note can only be used to buy or invest in a single asset. For example, you can either invest on a commercial property or a residential property. If the funds are being invested on property, they cannot be used to repair or improve the property.
The LRBA note will remain in effect until the borrowed money is extinguished. In other words, the loan is fully paid off. In the event that the loan cannot be repaid, the lender has the right to acquire legal ownership of the asset.
The Benefits of Borrowing Money on SMSF
Surprisingly, obtaining a loan using LRBA notes is rather easy, and most SMSFs will offer this type of service to their members. There are many benefits involved with obtaining a LRBA note. They include:
- the ability to diversify your investment in order to reap larger yields and returns;
- the ability to borrow more money than what a bank would typically be willing to offer you while paying a lower interest rate; and,
- the ability to take advantage of superannuation tax concessions in the future to gain larger profits.
Conclusion
LRBA notes offer a compelling opportunity for investors to borrow money in order to invest in additional ventures that may have been out of their reach before. If you are interested in borrowing on your SMSF and taking out a LRBA note, you should always get more information on the terms, conditions and tax consequences that are involved from a specialized financial advisor. Keep in mind that the Australian Tax Office (ATO) enforces strict rules and penalties surrounding how the funds acquired from LRBA notes can be used.
