Until legislative changes in September 2007, the SMSF
structure was viewed as being deficient and unattractive to a
certain degree, because of their inability to borrow money to
acquire assets. The Commonwealth Government and Australia Taxation
Office (ATO) through various legislative amendments and rulings
have been addressing this issue enabling SMSFs to borrow from banks
and or related parties on a Limited Recourse Borrowing Arrangement
(LRBA) to fund the acquisition of assets
The ATO has provided some guidance with the recent release of a
draft ruling (SMSFR 2011/D1) which has brought greater clarity to
the application of the key concepts relating to SMSF LRBA,
particularly in relation to:
how to structure this type of borrowing arrangement;
the structuring of real property asset acquisitions under a
the types of assets which may be funded;
permissible works in connection with any real property within a
SMSF LRBA as it clarifies what is an improvement versus a
the view that improvements to real property may be made using
the SMSF's cash reserves or insurance proceeds; and
what constitutes a "single acquirable asset".
The ATO ruling provides investors, legal advisors and lenders
with greater confidence to enter into such transactions but does
not diminish the importance of obtaining professional advice to
ascertain the costs, the appropriate documentation and compliance
with the Superannuation Industry (Supervision) Act 1993 (Cth)
Compliance with Superannuation Laws
Section 67A(1) of SISA provides for a general exemption from the
basic prohibition on SMSF borrowing where the following the
conditions are met:
the borrowing is applied to a single asset;
the borrowing must be applied to the acquisition of the
the asset being acquired must be held in a custodial trust with
the SMSF as the sole beneficiary of the asset;
the SMSF has the right to acquire the legal ownership of the
asset through the payment of instalments after acquiring a
beneficial interest in the asset; a lender's right to recoup
against the loan is limited to the recovery from the specific
no other encumbrance can be placed over the acquired asset
apart from the mortgage registered by the lender.
The trustee of the SMSF will need to also comply with all other
SISA requirements such as, amongst others, the trustee acting at
all times in compliance with the general laws and with due
diligence and care; the asset to be acquired must an asset
permitted to be acquired under SISA; the transaction does not
breach any rules such as related party transactions; and that of
the investment strategy of the SMSF
How does a LRBA Work
The establishment of a SMSF LRBA will require the following:
review of SMSF documentation;
a loan facility to be established from either the third party
lender or related party lender (such as members of the SMSF);
the establishment of a custodial trust (with a corporate
trustee) to hold the asset under LRBA.
This arrangement allows for all beneficial entitlements such as
investment returns to flow to the SMSF whilst the SMSF will be
liable for meeting the loan obligations.
Limited recourse to the acquired asset
Recent amendments to SISA provides protection to SMSFs to ensure
that if the SMSF defaults on a loan the lender's rights are
limited to the "acquired asset" held in the custodial
trust as the lender has no recourse to any other assets that are
held within the SMSF.
The rules surrounding LRBA are complex and professional legal
advice ought to be sought prior to entering into such an
arrangement as the imposition of penalty tax for a non-complying
SMSF will apply.
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