Australia: Commissioner releases draft ruling on limited recourse borrowing arrangements

Superannuation Update
Last Updated: 27 September 2011
Article by Heather Gray, Philip Broderick and Peter Charteris

The Commissioner of Taxation (Commissioner) has released his long-awaited draft ruling on Limited Recourse Borrowing Arrangements (LRBAs), SMSFR 2011/D1. LRBAs are borrowing arrangements that may be entered into by the trustees of superannuation funds without breaching the general prohibition against borrowing set out in section 67 of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

The draft ruling deals with three aspects of LRBAs:

  • the nature of an asset or single acquirable asset
  • the distinction between maintaining or repairing an asset and improving an asset
  • when an asset becomes a different, or a replacement, asset.

The draft ruling does not deal with other important issues relating to LRBAs, including the application of the in-house asset rules to the 'holding trust' once the borrowing has been repaid.


One of the LRBA requirements (set out in sections 67A and 67B of the SIS Act) is that the borrowed money must be applied for the acquisition of a 'single acquirable asset'.

Considerable confusion has arisen over the meaning of this expression, with particular difficulties surrounding the acquisition of properties such as farms or commercial properties that are spread over more than one title and apartments with linked car parks on separate titles. Advisers have been unsure whether the term 'asset', which is defined in the SIS Act to mean 'any form of property', should be given a meaning determined strictly by legal principles, or whether a broader, more commercial meaning should be applied.

The draft ruling states that the meaning of 'property' should be considered as relating to both 'proprietary rights' and to the object of these rights (ie the actual physical asset). Accordingly, the draft ruling suggests that a trustee may be acquiring a single acquirable asset if it is acquiring a single object of property notwithstanding that this is 'comprised of two or more proprietary rights' (eg a factory over two titles). Somewhat confusingly, and with some circularity, the draft ruling goes on to state that 'this will only be so where it is reasonable to conclude that the object of the separate proprietary rights is distinctly identifiable as a single asset'.

In brief, the Commissioner's view is that if assets can be dealt with separately, there will be more than one asset for LRBA purposes. If the law prevents assets from being dealt with separately (such as where the law requires that an apartment and its car park on separate titles can only be transferred together), then those assets will be a 'single acquirable asset'.

The following table sets out the Commissioner's view as expressed in the draft ruling as to whether particular assets are single acquirable assets.




Two adjacent blocks of land. The vendor will only sell them together


The two blocks could be dealt with separately, and it is irrelevant that the vendor will only sell them together

A factory built over three titles


No reason is given, but presumably it is because the titles cannot be sold separately without demolishing or first significantly modifying the factory

Farm land over multiple titles


There is no physical or legal impediment to dealing with the titles separately

Off-the-plan apartment


The completed apartment and title constitute a single asset

Building a residence on a fund's existing vacant land


The residence cannot be a separate asset from the land once it is fixed to the land and therefore the residence cannot be a single asset

Apartment with a separate carpark title. The carpark title cannot by law be disposed of separately


As the titles cannot be disposed of separately they constitute a single asset. However, if the carpark title could be disposed of separately this would be a separate asset

Serviced apartment with furnishings


The furnishings are separate assets

The Commissioner's view allows him to avoid some apparently inappropriate outcomes, eg by allowing a building situated across more than one title to be treated as a single acquirable asset. Although fund trustees will welcome this clarification as regards properties with buildings spanning multiple titles or with carpark titles, it leaves them with some uncertainty as to the application of the 'single acquirable asset' concept to multiple title properties. For example, although a property over two titles can be a single acquirable asset, would that cover a situation where there is a readily demountable building affixed across two titles?

Additionally, that view does nothing to address the difficulties that exist where a property spanning multiple titles can for practical purposes be dealt with only as a single asset (such as where the land comprised in one of the titles has no direct road access, or planning restrictions would effectively prevent it from being used for a commercial purpose). In such cases, fund trustees will be obliged to enter into multiple borrowing arrangements (assuming that a willing lender can be found).


Under a LRBA, the borrowed money can be used for repairs or maintenance but not for improvements.

The Commissioner takes the view that the difference between repairs or maintenance and improvements is a matter of fact and degree. Where work is done to a property that results in the property being made into a more valuable or desirable form, state or condition it is an improvement. Remedying or making good defects, damage or deterioration, or work done to prevent such things from occurring, constitutes repairs or maintenance respectively. The Commissioner indicates that Taxation Ruling 97/23, which is often referred to when issues concerning repairs or maintenance and improvements arise, will not necessarily be determinative in the LRBA context.

The draft ruling confirms that a LRBA can be structured in a manner that enables a fund trustee to draw down multiple amounts to effect repairs or maintenance. Each drawdown will be a part of the original complying LRBA.


Under complying LRBAs, the borrowing must initially be applied for the acquisition of a single acquirable asset and it must be maintained for this purpose. If the asset is changed or replaced while the LRBA remains in place, then the borrowing arrangement will cease to meet the LRBA requirements and will breach the general prohibition in section 67, unless one of the limited exceptions in section 67B of the SIS Act applies. The section 67B exceptions relate only to shares and units and there is no provision for real property that is the subject of a LRBA to be replaced.

The draft ruling therefore considers when an asset will cease to be the same asset under a LRBA and might therefore be a 'replacement asset'. The Commissioner's view is that a fundamental change to the proprietary rights in relation to an asset or the object of those rights will result in a different asset being held for LRBA purposes. This will be a question of fact and degree, and the draft ruling states that it will be relevant to consider whether the acquirable asset has been entirely replaced by another asset and whether the asset has been altered to such an extent that it now has a different function or purpose. In either case, these circumstances would indicate that there has been a replacement of the original acquirable asset.




A vacant block is subdivided into multiple titles


One asset has been replaced with several different assets

A vacant block has a building built on it


Character of the asset changed from vacant land to residential premises

A house on a block is demolished and three strata title units are built in its place


Character of premises and proprietary rights fundamentally changed

A house is built over two titles and subsequently the house is relocated so that it is only on one title


Following the relocation the fund holds two assets, one with a house on it and a vacant block

Land is rezoned and the house on that land is renovated so that it becomes commercial premises


Character of the premises has fundamentally changed from residential to commercial

A fire destroys a four-bedroom house and a four-bedroom house is constructed in its place with the insurance proceeds


Character of the premises is not changed. The rebuilding restores the premises. However, if a different building was constructed (eg multiple units or a commercial building) that would be a different asset

A cyclone damages the roof of a house. The roof is replaced, but a second storey is added to the house at the same time


The character of the asset and the proprietary rights are not fundamentally changed

A kitchen is extended


The character of the asset and the proprietary rights are not fundamentally changed

Repairs and maintenance are carried out and a pool or a new garage are added to a house property


The character of the asset and the proprietary rights are not fundamentally changed

A farm has the following additions: cattle yards; a bore, tank, windmill and trough; a dam and two kilometres of fencing


The character of the asset and the proprietary rights are not fundamentally changed

Advisers and fund trustees will welcome the confirmation that mere improvement of property, using the fund's own money, will not cause the property to be a different asset. The acknowledgement that fund trustees can rebuild properties that have been destroyed without creating a replacement asset is also helpful.

However, the Commissioner has made it clear that he does not consider that it is open to fund trustees to undertake any form of substantive property development while fund property remains subject to a borrowing. That will significantly reduce the situations in which borrowing to acquire real property will be attractive to self-managed superannuation funds and may be problematic for those that have acquired property with development in mind since the rules last changed on 7 July 2010.

Fund trustees may also face uncertainty in determining when improvements made to a property will cause the property to be a new asset, given the subjective element in assessing 'fundamental change'. If a residence burns down, then the fund trustee can rebuild similar premises, but can a fund trustee demolish an old residence so that it can build similar (but new) residential premises? Could a fund trustee alter commercial premises for a different kind of commercial use, such as by demolishing an old petrol station and replacing it with retail premises?

In summary, the draft ruling clarifies some of the uncertainties that exist regarding LRBAs, but indicates that the Commissioner will apply these rules in what many practitioners will consider to be an unduly restrictive way. Advisers may also face some practical difficulty in applying some of the principles that are explained in the draft ruling, such as the concept of 'fundamental change' to assets and the identification of single acquirable assets.

Comments regarding the draft ruling are sought by no later than 28 October 2011.

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