SMSFs and Limited Recourse Borrowing Arrangements | John Ramsden
A Self Managed Super Fund (SMSF) can be distinguished from an ordinary fund, as a SMSF enables members to act as trustees. A SMSF main benefit is that it provides members with complete control over investments of the fund. Investments can encompass buying and selling shares and other real and personal property and investing in cash. However, there are restrictions placed on the investing activities of SMSF’s. The Limited Recourse Borrowing Arrangement (LRBA) which limits a funds ability to borrow money is an example of such a restriction.
The aim of the Limited Recourse Borrowing Arrangement (LRBA)
The aim of the LRBA, which is set out in sections 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Act), is to allow a trustee to borrow monies to acquire an asset for the fund without placing the SMSF’s status as a super entity at risk. To supplement this provision, an amendment specifying conditions with respect to SMSF borrowing, was passed by the Federal Government. The amendments predominantly focus on ensuring the protection of existing assets from liabilities associated with borrowing.
The amendment of the Act included the addition of section 67(4A). This particular section allows a super fund to borrow or maintain a borrowing if:
- The borrowed money is or has been applied for the acquisition of an asset (or another asset required in substitution or replacement of the original) which is an asset of the fund not prohibited from acquiring;
- The asset is held on trust so that the fund acquires interest in the original asset or its replacement;
- The fund trustee has a right to acquire legal ownership of the asset or the replacement by making one or more payments after acquiring the beneficial interest; and/or
- The rights of the lender against the fund trustee for default on the borrowing.
Additionally, a trustee is to consider the following requirements:
- The asset being acquired must be one in which the fund could invest and hold directly;
- The transaction and the acquisition of the asset must comply with the fund’s investment strategy and its trust deed;
- The trustee’s duties imposed the Act or by general law;
- The sole purpose test;
- The transaction must not breach the rules against acquisitions from related parties or comply with them to the extent that they are allowed;
- The effect of an increased interest rate.
It is important to note that a trustee cannot borrow to improve an asset. As such, purchasing land and constructing a home for resale is prohibited. Borrowing is only permitted over a single asset or a collection of identical assets with the same market value.
The relationship between a SMSF and a LRBA posits a new development in the law. Particularly, a super fund is now permitted to borrow, or maintain a borrowing of money. This however, is contingent on the satisfaction of the aforementioned criteria. Thus, a superfund can borrow money so long as monies borrowed are used to acquire a permitted asset under the fund and the asset acquired is held on trust ensuring the fund receives a beneficial interest in the property.
If you would like further information in relation to Limited Recourse Borrowing Arrangements, or have a specific query about this topic, our consultants can provide professional advice in relation to your circumstances.
By John Ramsden, Lawyer and Managing Partner of Ramsden Lawyers.
21 Mar 2012