The ATO has released a draft legislative instrument and explanatory statement that would permit a holding trustee/bare trustee to borrow under a limited recourse borrowing arrangement (LRBA).  According to the ATO, such an arrangement already complies with section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) where the self managed superannuation fund (SMSF) trustee maintains the borrowing but it can cause the SMSF trustee to breach the in-house asset rules as the exemption in section 71(8) of the SIS Act does not apply.

Under the instrument, a LRBA borrowing by the bare trustee would not cause the SMSF trustee to breach the in-house asset rules if the following requirements are met:

1. the members of the SMSF are the only trustees or shareholders and directors of the bare trustee;

2. the SMSF trustee is a beneficiary of the holding trust;

3. the bare trustee holds an acquirable asset (Asset) on trust for the SMSF trustee, who is beneficially entitled to the Asset;

4. the Asset is a single acquirable asset that the SMSF trustee of the fund is allowed to acquire under the SIS Act;

5. the bare trustee enters into a borrowing as principal with a lender with the borrowing secured by a mortgage over the Asset;

6. the contract or deed of borrowing between the bare trustee and the lender may not limit the lender’s right of recourse, under the contract or deed, to only the Asset in the event of default;

7. the lender may require that personal guarantees are given as part of the Intermediary LRBA;

8. the arrangement is established by a legally binding deed(s) under which the SMSF trustee and the bare trustee agree, for:

• the SMSF trustee to maintain all borrowing obligations entered into by the bare trustee in respect of the borrowing;

• the SMSF trustee is absolutely entitled to any income derived from the Asset, less fees, costs, charges and expenses incidental to the acquisition, holding or management of the Asset;

• the SMSF trustee has the right to acquire the legal title of the Asset on completion of the borrowing;

• the rights of the bare trustee or any guarantors against the SMSF trustee in connection with default on the borrowing is limited to the Asset;

• the above documentation is disclosed to the lender in connection to the borrowing.

While the instrument, if implemented, will provide SMSF trustees with an additional borrowing option, it will be vital for the SMSF trustee and the bare trustee to structure such an arrangement in accordance with the relevant prescriptive requirements.

To discuss further or for more information please contact:

Phil Broderick
Principal
T +61 3 9611 0163  l M +61 419 512 801   
E: pbroderick@sladen.com.au           

Melissa Colaluca
Senior Associate
T +61 3 9611 0161
E: mcolaluca@sladen.com.au