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SMSFs and Limited Recourse Borrowing Arrangements | John Ramsden | Lawyer

SMSFs and Limited Recourse Borrowing Arrangements

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 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:

Additionally, a trustee is to consider the following requirements:

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 Shanan John Ramsden Lawyer and Managing Partner of Ramsden Lawyers.
21 Mar 2012