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Sladen snippet - Legislative Instrument permits LRBA borrowings by the bare trustee

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As previously discussed here, the ATO has now finalized the Superannuation Industry (Supervision) In-house Asset Determination — Intermediary Limited Recourse Borrowing Arrangement Determination 2020 (Determination).

Under section 71(1)(f) of the Superannuation Industry (Supervision) Act 1993 (SIS Act), the ATO has the power to exclude an asset from the definition of in-house assets.

Relying on this power, the Determination now ensures that an investment by an SMSF in a related trust that is in connection with an intermediary limited recourse borrowing arrangement (Intermediary LRBA), and that complies with s 67A of the SIS Act, is excluded from being an in-house asset of the SMSF in the circumstances described in the Determination.

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

1. 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; and

9. importantly - the documentation referred in paragraph 8 is disclosed to the lender at the time of the borrowing.

The Determination has retrospective effect from 24 September 2007.

The Determination now provides SMSF trustees with an additional borrowing option, however it is vital that the SMSF trustee, and bare trustee structure, comply with the relevant prescriptive requirements set out in the Determination. In particular, the SMSF and bare trustee must disclose the arrangement to the lender.

Importantly, the Determination will not apply where the investment would be an in-house asset if it was held directly by the SMSF.

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

Philippa Briglia
Senior Associate
T +61 3 9611 0173
E pbriglia@sladen.com.au

Phil Broderick