When setting up a Limited Recourse Borrowing Arrangement (LRBA) to purchase property through your Self-Managed Super Fund, one of the most common questions we hear is: “Can I have an offset account or redraw facility like my personal home loan?”
The answer is complex. While some lenders offer these features, using them incorrectly can lead to significant compliance issues with the ATO.
The Difference Between Redraw and Offset in an SMSF
In a standard residential mortgage, redraw and offset accounts are used interchangeably to reduce interest. However, in the world of SMSF lending, they are treated very differently by regulators.
1. Redraw Facilities (The Compliance Risk)
A redraw facility allows you to pull back extra repayments you’ve made on your loan. In an SMSF, this is generally considered a breach of the LRBA rules.
Under Section 67A of the Superannuation Industry (Supervision) Act, an SMSF is only allowed to borrow for the initial purchase of a “single acquirable asset.” If you redraw funds, the ATO may view this as a new borrowing that is not for the original purchase, potentially voiding the compliance of your entire LRBA structure.
2. Offset Accounts (The Safer Alternative)
An offset account is a separate deposit account linked to your loan. The balance in this account ‘offsets’ the loan principal, reducing the interest charged. Because the money is not being “re-borrowed” (it’s just sitting in a bank account), it is generally a safer option for SMSF trustees, provided it is set up correctly.
ADI vs. Non-ADI Lenders: Why it Matters
Since major banks exited the SMSF lending market, many trustees now work with non-Authorised Deposit-taking Institutions (non-ADI lenders).
- ADI Lenders (Banks): A genuine offset account with a bank is usually compliant because the money stays in a standard deposit account.
- Non-ADI Lenders: If your lender is not a bank, they cannot legally hold “deposits.” Instead, they may offer “sub-accounts” that mimic an offset. You must ensure your auditor and the ATO view these as genuine offsets rather than a form of redraw.
Why You Should Think Twice Before Adding an Offset
Just because a lender offers the feature doesn’t mean it’s the right move for your fund. Consider these factors:
- Higher Interest Rates: Lenders often charge a premium (0.15% to 0.25%) for loans with offset features.
- Opportunity Cost: Would that cash serve your fund better if it were invested in other assets (like shares or term deposits) within the SMSF?
- Compliance Complexity: You must ensure that no personal (non-SMSF) money ever touches the offset account, as this would be an illegal contribution to the fund.
Summary Checklist for Trustees
- Consult your auditor before activating an offset or redraw.
- Avoid Redraws entirely to protect your LRBA compliance.
- Calculate the ROI of the offset – does the interest saving outweigh the higher loan rate?
Ready to see how your SMSF loan stacks up? Use our SMSF Loan Calculator to model your repayments, or Contact the SMSF Mecca team to discuss which lenders currently offer compliant offset solutions.