In a previous
Alert, we posed the question as to whether the exemption to the
in-house asset rules in section 71(8) of the Superannuation
Industry (Supervision) Act 1993 (Cth) (SIS
Act) would continue to apply where the loan under a
limited recourse borrowing arrangement (LRBA) is
repaid, but the asset is retained by the custodian rather than
being transferred to the trustee of the self managed superannuation
The ATO has recently answered this question with the publication
of the Self Managed Superannuation Fund (Limited Recourse Borrowing
– In-House Asset Exclusion) Determination 2014 legislative
In this Alert, Partner Luke Mountford, Senior Associate Rosalie
Cattermole and Associate Laura Hanrahan examine the new Instrument
and discuss what effects it will have on SMSFs.
An in-house asset includes an asset of a superannuation fund
that is an investment in a related trust of the fund. Section 71(8)
of the SIS Act provides an exemption for an investment in a related
trust in connection with a borrowing covered by section 67A(1) of
the SIS Act.
Given the requirement that the investment in the related trust
be "in connection with a borrowing arrangement", the
question arose as to whether the in-house asset exemption would
continue to apply if the borrowing was repaid in full and the asset
remained registered to the custodian.
Effect of Instrument
The Instrument has clarified the position by providing that an
asset of an SMSF that is an investment in a related trust is not an
in-house asset of the fund at a time (the test time) where:
the application of section 71(8) of the SIS Act resulted in the
investment asset not being an in-house asset of the fund at all
times, from when the related trust began to hold the asset until
the relevant borrowing was repaid; and
the application of section 71(8) of the SIS Act would result in
the investment not being an in-house asset of the fund at the test
time, but for the fact that the borrowing has been repaid.
In other words, if the exemption in section 71(8) applied up
until the time that the borrowing was repaid, the fact that the
borrowing has been repaid will not stop the exemption from applying
and result in the investment becoming an in-house asset.
The Instrument also clarifies the position in relation to
investments in related trusts of funds that would be exempt from
being in-house assets but for the fact that the borrowing has not
yet begun and the related trust does not yet hold the asset.
In those circumstances, provided that it is reasonable to
such a borrowing will occur;
that the related trust will hold the asset; and
the exemption under section 71(8) would apply to exempt the
investment from being an in-house asset from the time the related
trust begins to hold the asset, then
the investment will not be an in-house asset at that time.
The Instrument is taken to have commenced on 24 September 2007,
which was the date of effect of the provisions in the SIS Act that
allowed trustees of superannuation funds to enter into LRBAs.
In light of the Instrument confirming that the exemption will
continue to apply after the borrowing has been repaid, there is no
need for hesitation in paying out borrowings in full.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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