smsf borrowing rules[1]

8/2/2019 SMSF Borrowing Rules[1]

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SMSF Borrowing Rules

In years gone by, as a general rule, self managed superannuation funds were not allowed to borrow, albeitsubject to a very limited number of exceptions.

However, following the introduction of the instalment warrant borrowing exception in 2007, for the firsttime SMSFs were allowed to borrow for investment purposes, as long as a set of specific criteria could besatisfied. Unfortunately, this new borrowing exception resulted in a degree of uncertainty which led todiffering industry views and practices.

Less than 3 years later, in July 2010, new legislation was passed replacing the instalment warrantborrowing exception. Referred to as Limited Recourse Borrowing Arrangements, this current borrowingexception provides greater clarity and certainty, while focussing on reducing the risks faced by fundtrustees.

This guide takes a closer look at the criteria required for an SMSF to borrow in accordance with the

requirements set out for Limited Recourse Borrowing Arrangements.

Table of contentsThe SIS borrowing restriction...................................................................................................2

Grandfathering of existing arrangements................................................................................................................2 Basic principles of SMSF borrowing arrangements ............................................................... 2 1. The SMSF borrows money....................................................................................................4

Bank loans and third party guarantees....................................................................................................................5 2. Borrowed monies are used to purchase an asset...............................................................6

Acquirable assets ....................................................................................................................................................6 4. Asset is held on bare trust for the fund ...............................................................................7

Replacement asset..................................................................................................................................................8 5. Fund repays loan, asset transfers to fund...........................................................................9

When the SMSF faces difficulties in making repayments .......................................................................................9 Applications for small business owners................................................................................10

Acquiring business real property ...........................................................................................................................10 Related party loans................................................................................................................................................11

Closing thoughts .....................................................................................................................12 Related material .............................................................................Error! Bookmark not defined.




The SIS borrowing restrictionSection 67 of the Superannuation Industry (Supervision) Act (SIS) contains a longstanding generalprohibition preventing a superannuation fund from borrowing, albeit with a number of limited exceptions.

Following the passage of legislation in September 2007, an additional exception to the borrowingrestriction, titled “instalment warrants”, was created. While, as the title suggests, this exception wasseemingly intended to provide certainty to superannuation fund trustees when investing in instalmentwarrants, its application was indeed far broader.

Certain areas of the instalment warrant borrowing legislation created uncertainty and resulted in varyingindustry practices. To provide clarity, and to reduce the level of risk faced by SMSF trustees, in July2010 the instalment warrant borrowing exception was replaced by a new borrowing exception titled“Limited Recourse Borrowing Arrangements”.

Grandfathering of existing arrangements

The criteria set out under the Limited Recourse Borrowing Arrangement borrowing exception willgenerally only apply to arrangements entered into on or after 7 July 2010.

On the other hand, arrangements entered into before this date will continue to be assessed against thecriteria set out under the former Instalment Warrant borrowing exception.

However, an Instalment Warrant-like Arrangement (i.e. established under the “old rules” – before 7 July2010) will be assessed under the Limited Recourse Borrowing Arrangement rules (“the new rules”) if thearrangement is:

Re-financed on or after 7 July 2010; or Sufficiently changed on or after 7 July 2010.

Generally, the new rules are more restrictive than the old rules. So, causing an Instalment Warrantarrangement to be re-assessed under the Limited Recourse Borrowing Arrangement rules is likely tolead to an undesirable outcome and should be avoided as far as possible.

Basic principles of SMSF borrowing arrangementsWhile there are some very important differences between the old and the new borrowing rules, the basicprinciples that allow an SMSF to borrow for investment purposes under both rules are very similar andhave broadly been outlined in Table 1.

Some of the key differences have also been highlighted in this table.

Note: Simply re-negotiating the terms of an existing loan, e.g. merely extending the term, willgenerally not result in a trigger of the new Limited Recourse Borrowing Arrangement rules. On theother hand, re-financing the loan, or materially changing the terms and conditions of the overallarrangement is likely to result in such a trigger event.




Table 1

Five basic principles for SMSF borrowing arrangements

1. An SMSF borrows money from a lender whereby the loan is of a limited recourse nature.

Old rules: The rights of the lender against the superannuation fund are limited to the rights relating to theasset purchased with the borrowed funds (or a replacement asset).

The provision of a third party guarantee, where the guarantor’s personal assets are provided as additionalsecurity, will not be restricted in any way, nor will a guarantor be required to waive their usual rights ofindemnity against the fund trustee(s). However, as the provision of a guarantee may expose the SMSF toadditional risks, fund trustees are urged to exercise caution.

New rules: The rights of the lender, or any other person, against the superannuation fund are limited tothe rights relating to the asset purchased with the borrowed funds (or a replacement asset) – discussedlater.

2. The borrowed money is applied to the purchase of an asset.

Old rules: “An asset” not defined in legislation, but following ATO confirmation, can be read in the plural.

Therefore allowing borrowed money to be used to purchase multiple assets e.g. a mixed portfolio of shares,as well as allowing borrowed monies to be applied to the development or capital improvement of realproperty.

New rules: Borrowed money must be applied to the purchase of a single “acquirable asset” which isdefined in legislation – discussed later.

3. The asset purchased must be an asset the fund would otherwise be allowed to acquire directly, havingregard to the usual superannuation investment rules.

No difference between old and new rules

4. The asset purchased (or a replacement asset) is held in trust for the superannuation fund, with thesuperannuation fund holding a beneficial interest in that asset.

Old rules: “Replacement asset” not defined in legislation, but following ATO confirmation, the definition israther broad.

Accordingly, instalment warrant-like arrangements would be able to allow a voluntary trading of assets e.g.

selling BHP shares to buy AMP shares. Further, capital improvements to property, using other fund assets,would also be possible.

Both of these common examples would be recognised as an allowable replacement asset under aninstalment warrant-like arrangement.

New rules: Circumstances where a “replacement asset” will be allowed are defined in legislation, and ismuch narrower – discussed later.

5. The superannuation fund has a right to acquire the asset following the fund making one or moresubsequent payments.

No difference under old and new rules

By carefully applying these five basic principles, an SMSF is able to borrow money for investmentpurposes, without breaching the general borrowing prohibition.




Let’s start by taking a diagrammatical look at how such an arrangement will generally operate in practice.

Diagram 1: Operation of Limited Recourse Borrowing Arrangements

We will look at each of the elements illustrated above in detail.

1. The SMSF borrows moneyOnce an SMSF has identified a suitable investment and has made the decision to obtain finance topurchase it, the fund will seek out an appropriate lender. In doing so, the SMSF will need to enter into anappropriately structured loan arrangement, with all loan documentation being carefully drawn upbetween the fund and the lender.

One of the key requirements of any such loan is that the rights of the lender, as well as the rights of any other person (e.g. a guarantor) in the event of a default on the borrowings, are strictly limited to the rightsrelating to the acquired asset, or a replacement asset, that is held within the trust. This requirementensures that no other fund asset is put at risk as a result of the fund obtaining this loan.

Interestingly, the legislation does not place any restrictions upon who an SMSF is able to borrow moneyfrom. In fact, the ATO has confirmed that as long as the fund continues to comply with existing SISinvestment restrictions, the lender could be a lending institution, or a related party (including a member

of the fund).In saying that, where the loan is obtained from a related party of the fund, it is imperative that all rates,terms, and conditions are entered into on commercial, arm’s length terms. In order to demonstrate that

SMSF makes loanrepayments to lender

Legal ownership ofasset rests with the

custodian

Beneficial ownershipof asset belongs to

SMSF

Lender

SMSF

Vendor

Custodian/Bare trust

Lender providesfinance to

SMSF

SMSF paysvendor for asset




this has occurred, an arms length rate should be based on reasonably objective and supportable data,such as rates that would be charged by an arms length financial institution for a similar borrowing.

Conversely, if a loan is entered into at a rate that is lower than a commercial rate, the loan may not berecognised as a borrowing, but instead may be treated as a contribution. Given the significant penaltiesapplicable for breaching contribution caps, this could produce an undesirable outcome.

In addition to ensuring that the rate, terms and conditions of a related party loan are commercial, theloan should be appropriately documented. It should also be made abundantly clear that the moneyprovided by the related party was actually borrowed. Once again, failure to do so might result in themoney being treated as a contribution rather than a loan.

And finally, there is no limit or restriction on where a related party lender actually sources the funds from.As such, a related party may seek to borrow personally (on a full recourse basis) and on-lend thosemonies to the SMSF on a limited recourse basis and under commercial terms and conditions.

This may be useful for a number of reasons. For example, consider a situation where an SMSF is

seeking to obtain finance to purchase an asset that a bank will not easily accept as security e.g. tenantsin common share of a property or units in a related unit trust. Alternatively, it might be useful in avoidingthe need to re-finance the SMSF loan, while allowing the full recourse loan between the bank and themember to be re-financed as and when required.

Bank loans and third party guarantees

Obviously, not all loans will be sourced from a related party and there are likely to be many instanceswhere the source of the loan is in fact a lending institution, such as a bank.

While lending institutions may advertise certain products as being SMSF loan products, care needs to be

taken to ensure that the terms and conditions of these loan arrangements are in accordance with therequirements of sections 67A and 67B.

One issue which often arises is the requirement for a third party guarantee to be provided in order for theSMSF to secure a loan. While providing a guarantee is not, in itself, likely to result in a breach of theborrowing exception, it is important to ensure that the provision of any such guarantee does not exposeany of the fund’s other assets to risk. In essence, the recourse that is available to the lender, as well asthe recourse that may subsequently be available to any other person (e.g. a third party guarantor) mustbe limited to the rights relating to the acquired asset, or its replacement asset. In practice, this mayinvolve the guarantor explicitly waiving their right to pursue the fund’s other assets in the event of thedefault.

Further, where a guarantee is provided to a lender and the guarantee is subsequently called upon, thiswill lead to a payment being made by the guarantor. This payment may result in a contribution being

Note: Related party loans will result in the interest received by the related lender (e.g. a member)being treated as assessable income in their hands. At the same time, any interest they pay to a bank,where this borrowed money is on-lent to their SMSF, would be deductible to them personally.

Tip: Care should be taken when arranging a loan from an associated company. Certain distributions

to entities connected with a private company are subject to special tax rules (Division 7A of IncomeTax Assessment Act 1936). Where clients are considering a Limited Recourse BorrowingArrangement with an associated company as lender, professional taxation advice is stronglyrecommended before proceeding.




deemed to have been made to the fund. Depending on the amount in question, this may proveproblematic given the penalties associated with exceeding contribution caps.

Determining whether such a payment would amount to a contribution will depend on the particular factsof the case and whether the payment would result in a liability of the fund being satisfied by the member.However, the ATO has provided some guidance on this as follows.

“If a guarantor makes a payment to the lender under an arrangement where they have foregone their usual rights of indemnity against the principal debtor (the SMSF trustee) in respect of the guarantee, this is a contribution to the SMSF if it satisfies a liability of the SMSF. This might happen, for example, if the guarantor paid the borrowing and the acquirable asset was transferred to the SMSF trustee under the arrangement.

In contrast, there is no contribution if the SMSF trustee has exercised a right to ‘walk away’ from the arrangement (and has lost the acquirable asset to the lender) and has no further liability, but the lender still exercises a right to call on the guarantee for a shortfall after disposal of the original asset.”

Suffice to say, that if a loan requires the provision of a third party guarantee that caution be exercisedand appropriate legal advice sought.

2. Borrowed monies are used to purchase an assetOnce the loan has been arranged, the borrowed monies must be used by the fund to purchase an asset.As such, the asset must be one that the fund does not currently own, i.e. an SMSF cannot borrowagainst any existing fund assets. To do so would result in the SMSF creating a charge over a fund asset.

While the asset itself can be any asset the fund would ordinarily be allowed to purchase, including anasset acquired from a related party of the fund where permitted by the fund’s investment strategy andthe usual SIS investment restrictions, it will need to meet the definition of a single acquirable asset .

Acquirable assets

Under a limited recourse borrowing arrangement, an acquirable asset is broadly defined as any asset,other than money, that a superannuation fund is otherwise not prohibited from acquiring. Of mostsignificance, an acquirable asset is to be viewed in the singular, that is, a single acquirable asset.

However, the definition of an acquirable asset will allow a collection of assets to be regarded as a singleasset as long as all of the assets in that collection are identical and have the same market value.

Where a collection of assets is to be acquired under these arrangements, the assets must be bothacquired, and disposed of, at the same time.

For example, this ensures that a limited recourse borrowing arrangement to purchase a parcel of sharesin the same company would be allowed, where the shares are of the same class and carry the samemarket value e.g. ordinary Rio Tinto shares acquired at the same time.

On the other hand, a share portfolio consisting of shares in various companies will not be a singleacquirable asset. In order to borrow to establish a mixed share portfolio, a separate loan arrangementwill need to be entered into for each parcel of shares. This may be impractical for some funds.

Expenses relating to borrowing, maintenance, and repairs

Further, an SMSF will be able to use borrowed funds to cover fund expenses that are intrinsically linkedto the purchase of that asset. For example, this will include expenses relating to obtaining the borrowing,




and maintaining or repairing the acquired asset (to the extent that the works ensure the asset’s value isnot diminished).

On the other hand, expenses that relate to improving the asset are expressly excluded.

So, in the context of a property investment, this means that: Costs such as loan establishment fees, conveyance fees, and stamp duty can be funded using

borrowed monies; and, Any repair work that is undertaken in order to ensure that the property’s value is not diminished can

be carried out using borrowed monies; however, Borrowed money cannot be put towards improving or developing the asset (refer to later discussion

on replacement assets for further information on improvements).

4. Asset is held on bare trust for the fundAlthough it is the SMSF that borrows the money used to fund the asset purchase, it is a requirement ofthe borrowing exception that:

the asset, or a replacement asset, is held in trust for the SMSF;

the SMSF has the beneficial interest in the asset; and

the SMSF has the right to acquire legal ownership of the asset upon full repayment of the loan.

To satisfy this requirement, a bare trust is established by a suitably qualified legal practitioner. In thiscontext, a bare trust is a trust where:

the beneficiary (the SMSF) is absolutely entitled as against the custodian (bare trustee); and

the custodian has no active duties to perform.

In essence, what this means is that the bare trust is the legal (or nominal) owner of the asset, while theSMSF is the beneficial owner of the asset.

As the legal owner, the bare trustee will usually sign contracts for purchase and be shown as the owneron all documentation. However, the bare trust trustee will merely hold the property for the benefit of thefund and in practice will not perform any active duties.

For example, the bare trust will not collect rent, pay investment related expenses etc. Instead, it willgenerally only act at the direction of the SMSF trustee. If a property is to be leased, the SMSF will directthe bare trustee to do so, with instructions for the lease repayments to be made directly to the SMSF’sbank account.

As the beneficial owner, the SMSF will receive any income derived by the investment. Depending on thetype of investment held, this may include rent (from property), dividends (from shares) etc.

Note: When dealing with land/property investments there may be a number of stamp dutyconsiderations. Stamp duty rules vary from state to state so appropriate legal advice should beobtained prior to any part of the purchase taking place.

Significant stamp duty penalties may apply where transactions are not executed in a proper manner.For example, to avoid potential double stamp duty in some states, it is often a requirement that allpurchase monies (including deposits) be paid by the fund and not by the bare trust or any other party.




In house asset considerations

The borrowing arrangements involve holding an asset through a trust, which will inevitably be a relatedtrust – ordinarily triggering in house asset concerns. However, an in house asset exception exists for thistype of trust provided that: the trust is part of an arrangement that meets all the requirements of Limited Recourse Borrowing

Arrangements; the only asset held within the trust is the original acquirable asset, or a replacement asset; and the asset held within the trust would not in itself be an in house asset of the fund if it were owned by

the fund directly.

As a result, dividend re-investment plans (or similar arrangements) should be avoided as newshares/units acquired under such a facility will not be recognised as replacement assets (refer todiscussion on replacement assets below).

Further, once the borrowing has ended, the in house asset exemption will cease to apply. Therefore,should the bare trust continue to hold the asset, the SMSFs interest in that trust will become an in houseasset of the fund.

Replacement asset

For limited recourse borrowing arrangements, the circumstances in which a replacement asset ispermitted have been defined to include only a small and limited number of situations, including:

Shares in a company, or units in a unit trust, where the replacement asset is a share or unit:o in the same company/trust, and the replacement share/unit has the same market value as

the original share/unit; oro in another company/trust, and the replacement occurs as a result of a takeover, merger,

demerger, or restructure; and Instalment receipts, acquired under a limited recourse borrowing arrangement, that confer an interest

in shares in a company, where the replacement asset is the actual share in the company.

As a result, a fund will not be permitted to voluntarily replace, trade, or swap an asset acquired under alimited recourse borrowing arrangement. For example, a voluntary decision to sell shares in BHP, inorder to buy shares in AMP Ltd following a review of the fund’s investment strategy would not beregarded as an allowable replacement asset.

Further, when dealing with borrowing arrangements involving real property, caution must be exercisedas the following transactions are specifically not permitted:

A replacement by way of improvement to the property; Subdivision of land resulting in several titles being created over a previous single title;

A replacement of title as a result of government action such as re-zoning; and A replacement asset arising from an insurance claim covering the loss to the original asset.

Note: Failure to properly execute a bare trust arrangement may lead to unnecessary stamp dutyand/or CGT implications. It is important appropriate legal advice be obtained prior to any part of thepurchase taking place.

Tip: In establishing a bare trust, a separate trustee will need to be appointed. While either a corporateor individual trustee structure may be used, this trustee will need to be different to the trustee of theSMSF.




5. Fund repays loan, asset transfers to fundThe SMSF is the party to the loan and is therefore responsible for loan repayments. As such, anassessment of the SMSF’s cash flow stability is very important, with the main source of income likely tobe obtained via member contributions and fund investment returns.

In practice, once the loan amount is repaid the SMSF will be able to direct the custodian to transfer thelegal ownership of the asset to the fund. At this point, the borrowing arrangement has effectively come toan end.

If the arrangement has been structured properly, and appropriate legal processes accurately followed, itshould be possible for this transfer of legal title to the SMSF to proceed without attracting any CGT orstamp duty. Failure to have followed these steps correctly may result in CGT and/or a second hit ofstamp duty!

When the SMSF faces difficulties in making repayments

Depending on the circumstances, a loan entered into under a Limited Recourse Borrowing Arrangementmay be re-financed, along with any accrued interest on that borrowing. This may assist the fund inmeeting its obligations.

Under circumstances where the fund is unable to repay the loan, the lender is likely to pursue action torecover any outstanding liability. As described earlier, due to the limited recourse nature of the

borrowing, if this situation were to eventuate, the lender would have no claim on any assets of the fund,other than the asset purchased through this arrangement.

As such, the lender is likely to seek recovery against the asset held within the trust, which may be byway of a forced sale, as well as potentially pursuing the guarantor (if there is one) for any shortfall.

Along with the definition of acquirable asset discussed earlier, this list of exclusions effectively puts astop to the practice of developing property acquired under a properly structured borrowingarrangement, regardless of whether the development activity is conducted using borrowed money orother resources of the fund.

The reason that property development using other resources of the fund is not permitted is due tothe fact that if it were allowed, the development of the property held within a Limited RecourseBorrowing Arrangement would increase the level of risk that the fund is exposed to. This is becausethe improved property value would now effectively be available as security for the original borrowing.

Reminder: Re-financing an arrangement entered into before 7 July 2010 (under the old instalmentwarrant rules), will result in a trigger of the new and more restrictive Limited Recourse BorrowingArrangement rules.

Where the asset is merely an investment asset, upon loan default, a forced sale by the lender is likelyto result in a loss to the fund. However, a loan default could have far wider reaching implications if theasset was, for example, a property being used by the member(s) in their own business.




Applications for small business owners

Acquiring business real property

Small business owners may consider establishing a Limited Recourse Borrowing Arrangement in order

for their SMSF to acquire their business premises for the following reasons:

1. Holding their business premises within super will ensure any future earnings (both income andcapital) will be taxed at a maximum rate of 15%.

2. It provides an avenue to add further monies into their superannuation funds, over and above theircontribution caps, without penalty.

For example, if business premises were to be transferred into an SMSF, the business owner wouldbe required to pay rent to the fund on commercial terms. As this money is being paid in the form ofrent, it would not be considered a contribution. The rent payments will generally be tax deductible tothe business owner and will increase the size of the fund. With the concessional contribution cap for2010/11 set at $25,000 for those under age 50, this may be a useful way to get additional money intothe fund, without breaching the caps.

However, as the fund will need to use this rent, as well as potentially some of the contributions itreceives to make the loan repayments, the actual benefits need to be carefully assessed.

3. It allows accumulated superannuation benefits, which are otherwise not practically available untilretirement, to effectively be used as a “deposit” to fund the purchase of business premises.

Example 1: Acquiring business premisesBrian and Lara are married and run a small chiropractic practice. They are both making concessionalsuperannuation contributions up to their $25,000 cap (as they are both under 50). They currently leasetheir business premises from an unrelated landlord.

Following a spurt of rapid business growth, they have identified a larger surgery in a neighbouringsuburb from which they can better run their practice.

In line with the fund’s investment strategy, Brian and Lara have decided they would like to purchase thisproperty through their SMSF, the B & L Family Super Fund. Unfortunately, they only have a combinedvalue of $500,000 in this fund and the business premises are valued at $900,000.

To facilitate the purchase, the B & L Family Super Fund will borrow $400,000 under a properlyconstructed and complying Limited Recourse Borrowing Arrangement. By combining the borrowedmoney with the fund’s existing cash holdings of $500,000, the B & L Family Super Fund will now be ableto purchase the business premises. The business premises can then be leased back to Brian and Lara’schiropractic practice at a commercial rate of rent.

The transfer of property into an SMSF is a CGT event for the disposing individual/entity. However,where the property is used in the business of the disposing entity (or a connected/associated entity), it

may be possible to apply the various Small Business CGT concessions to reduce/eliminate this taxliability.




Benefits:

Brian and Lara have been able to access the capital in their SMSF to reduce the required level ofborrowing from $900,000 down to $400,000.

The lease payments previously being paid to a landlord will now be paid into their SMSF, buildingtheir retirement assets while continuing to be tax deductible to the business.

The interest expenses incurred by the SMSF in association with the borrowed money will bedeductible to the fund. If the property purchase is negatively geared, the excess tax deductionscan effectively be used to reduce any “contributions tax” liability of the fund.

As the lease payments are not superannuation contributions, Brian and Lara will be able tocontinue making deductible contributions up to their concessional cap, in addition to the leasepayments they are making to their SMSF.

Any capital gains tax, arising from the eventual sale of the property in the SMSF, will be cappedat a maximum rate of 10%. This could fall to zero if the building is disposed of in pension phase(including under a transition to retirement income stream).

Danger:

Should the fund fail to make loan repayments and subsequently default on the loan, for examplebecause the members are no longer able to make superannuation contributions, the surgery islikely to be repossessed and/or sold by the lender. This may have flow on impacts to themembers and their business.

The arrangement will result in their fund holding a single illiquid and bulky asset. Brian and Laraneed to be aware of the risk that the lack diversification within the SMSF poses. For example, ifBrian and Lara start a pension (including a transition to retirement income stream), under SISrules, minimum income payments must be drawn from the fund. If the SMSF holds very fewassets, other than the property, the fund may find it difficult to ensure that rental income from the

property is sufficient to cover the minimum pension payments.

Related party loans

SMSF loans obtained from a related party of the fund, usually from a member or associated entity, mayprovide a way for money to be added to super without incurring contribution cap penalties. In addition,whilst in the fund, the money will be taxed at a maximum of 15%, as opposed to the lender’s marginaltax rate.

However, as the loan agreement needs to be entered into on commercial terms, loan repayments to thelender (individual or entity) will be accompanied with an interest component. As a result, the interestcomponent associated with any loan repayments made to the related party will need to be added to their

assessable income and taxed at their applicable tax rates.

Where a related party borrows personally in order to provide the SMSF with this loan, the associatedinterest expense they incur would generally be allowed as a tax deduction, which may help to alleviatetheir own tax liability.

Applications1. A related party loan may help an SMSF to complete a short-term acquisition of a bulky fund asset

where contribution caps are, or are likely to be, exceeded.

As the contribution caps restrict non-concessional contributions to $450,000, the outright purchase oflarger assets may not always be possible using existing member balances.




In the example of Brian and Lara (above), if they had the required $400,000 available personally, theycould have loaned this amount to the fund rather than obtaining finance from a lending institution. Indoing so, they would not impact their non concessional contribution caps, and may rest easier in theknowledge the money would gradually be repaid to them.

2. A related party loan may increase the flexibility available to the SMSF.

For example, if an SMSF is likely to require the option to re-finance, then establishing a loan betweena member and the fund may be beneficial. In such a scenario, the loan between the member and thefund will remain undisturbed by any movement or conditions placed on the loan between the memberand the lending institution.

Closing thoughtsThe Limited Recourse Borrowing Arrangements, contained within sections 67A and 67B, have clarifiedmany of the grey areas that existed under the former Instalment Warrant borrowing exception. SMSFtrustees can now enter into borrowing arrangements with greater confidence, particularly in situationsinvolving related party loans and personal guarantees.

The Limited Recourse Borrowing Arrangements also seem to be more practically applicable to theacquisition of single bulky assets, such as property – where the asset is more likely to be held and notdeveloped for the duration of the loan. Shares, on the other hand, may prove more problematic from apractical perspective, particularly given that active investment trading will not be permitted.

Disclaimer

The information provided in this Technical Strategy is believed to be accurate and reliable as at 17 September 2010 andis of a general nature only. It is for professional planner use only - it is not to be distributed to clients. It is provided byAMP Life Limited ABN 84 079 300 379. AMP Life is not responsible for any errors or omissions.

smsf borrowing rules[1]

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