In the ATO’s NTLG Super Technical Sub group December 2012 meeting, an interesting question was raised regarding payments made for a house and land package under a limited recourse borrowing arrangement.
The question related to an example in SMSFR 2012/1, which concerns the purchase of a house and land package by a SMSF under a LRBA. The ATO had said in that example that “because the contractual arrangement is for the acquisition of land with a completed house on it, and settlement occurs once construction of the house is finished, the deposit and the payment on settlement can be funded under a single LRBA.”
OK, great. The question then is – in this situation, can there be only two payments – a deposit and a settlement payment ?
It used to be common knowledge that you simply can’t borrow money in a SMSF. However with the advent of limited recourse borrowing arrangements (LRBAs) this all changed .
You see, in the last 12 to 18 months we have been seeing a lot more marketing (some of it quite aggressive) around “borrowing in your SMSF” by both lenders and businesses involved in selling property.
What we have observed in that there appears to be a side affect of this.
The ATO have recently issued a tax payer alert (TA 2012/7) which alerts SMSF trustees to some problems they are seeing with regard to limited recourse borrowing arrangements to invest in property.
Essentially, the arrangements they describe are those that the ATO are coming across that do NOT comply with superannuation law.
Property investments using a LRBA
The first situation the ATO alert us to is the simple case of buying property in a SMSF using a LRBA.
The following are the key problems that ATO are finding:
We reported back in September of last year on a draft ruling that the ATO had released around a number of key concepts to do with SMSF limited recourse borrowing arrangements (LRBA’s). Submissions were invited and the ATO has now come out with its final ruling (SMSFR 2012/1). They key issues that the ruling addresses are:
- defining a single acquirable asset
- distinguishing between improvements vs repairs
- improving an asset to the extent if becomes a replacement asset
- property development and off-the-plan purchases.
The ATO have released their latest draft ruling which seeks to clarify their position on a number of issues around limited recourse borrowing arrangements (LRBA).
The bottom line is that it’s actually pretty good news, with a common sense and commercial approach being shown by the ATO.
Whilst it’s a fairly involved ruling, the following is a summary of the key points covered:
by Darren Kingdon
Director – SISFA (Small Independent Super Funds Association)
NOTE: this table has been updated as at 31st January 2012
The table below represents a short form summary of ATO thinking into some contentious issues involving limited recourse borrowing arrangements by self managed superannuation funds (as at 31/01/12). It has been put together by Darren Kingdon, SMSF technical expert and a Director of SISFA. It does not represent a comprehensive analysis of the ATO position and is highly simplified. This discussion paper should not be relied upon nor viewed as a specific ATO ruling.
|Issue||Current ATO view|
|Property subdivision into multiple titles after acquisition of single acquirable asset||No. This creates replacement asset(ref: SMSFR 2011/D1)|
|Joint investors/borrowers investing via the one holding trust||No. Not possible to acquire single acquirable asset or original asset (ref: ATO ID 2010/172)|
|Single acquirable asset includes accessory units and/or covers multiple land titles||Yes. But only where the assets practically inseparable (ref: Sept 2010 NTLG/SMSFR 2011/D1)|
|Not transferring the single acquirable asset to SMSF once the loan has been fully repaid||? Considered an in-house asset, but has been referred to APRA/Treasury for further consideration (ref: Sept 2010 NTLG)|
|Borrowing additional funds to improve or develop the single acquirable asset||No. Rights not limited to single acquirable asset (ref: Sept 2010 NTLG & EM)|
|Borrowing to repair or maintain the single acquirable asset||Yes. Specifically covered by legislation (Section 67A of SISA)|
|Improving or developing single acquirable asset with (non-borrowed) SMSF money||Yes. But only where the fundamental character of the asset remains unchanged (SMSFR 2011/D1)|
|Off the plan purchases||Yes. But only where the deposit is paid in cash and LRBA entered into at settlement (SMSFR 2011/D1)|
|Personal guarantees||Yes. But only where rights expressly limited to the LRBA asset (ref: ATO ID 2010/170)|
|Refinancing loan||Yes. Where loan straight replacement/swap (ref: ATO ID 2010/169)|
|Related party lending on favourable terms to the SMSF||Yes. Terms of the loan can be more favourable to the SMSF, not the related party under s109 (ref: ATO ID 2010/162)|
|Capitalisation of interest (pre 7 July 2010 arrangements)||Yes. (ATO ID 2010/184)|
|Charges granted by holding trust in favour of entity other than lender||No. Cannot create charge other than in relation to SMSF borrowing (ref: ATO ID 2010/185)|
|Applying insurance claim proceeds to restore single acquirable asset||Yes. But only where the insurance proceeds are used to restore the original asset (SMSFR 2011/D1)|
|Borrow from related party to improve asset legally owned by SMSF||No. The giving of a charge over an existing asset would breach the law (ref: ATO Q&A)|
|Additional shares issued under dividend reinvestment or as bonus shares||No. Not a permitted replacement asset (ref: ATO Q&A)|
|LRBA over multiple differentiated assets||No. Arrangement does not involve a single acquirable asset (ref: EM)|
|Furnishings (non-fixtures) forming part of single limited recourse borrowing arrangement of real property||No. Requires a separate LRBA (ref: EM)|
EM = Explanatory Memorandum to Superannuation Industry (Supervision) Amendment Bill 2010
ATO ID = Australian Taxation Office Interpretative Decision
Q&A = Limited Recourse Borrowing Arrangements by SMSFs – Questions & Answers – 29 July 2010
NTLG = National Tax Liaison Group Superannuation Technical Committee
SMSFR = Self Managed Superannuation Funds Ruling
*Please note that you are welcome to leave comments or prompt discussion on the topic in the space below, however this is NOT a forum to ask questions to receive either general or personal advice. These will not be posted nor replied to.
With the increasing awareness of the Superannuation borrowing provisions, and the perpetual interest in property from investors where gearing is concerned, a number of issues continue to be asked of the ATO in regards to specific circumstances.
A recent one involves off the plan (OTP) development. Specifically, the question was raised as to how the ATO views the purchase by a DIY superannuation fund of say, an OTP apartment such as a strata-titled apartment, under section 67A of SISA (the borrowing provisions).
Firstly by way of background, an OTP purchase will typically involve the SMSF signing a contract for the vendor to deliver a completed apartment at settlement. The vendor will then generally enter a contract with a builder to build the apartment and the purchaser merely enters the purchase contract for the completed apartment and land. However there may still be the need to sub-divide the title and build the apartment at the time of signing. Hence, settlement will often be delayed until a certificate of occupancy is issued for the apartment once it is completed and the building surveyor has signed-off that it complies with relevant planning, etc.
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One of the uncertainties in the area of SMSF borrowing that has emerged recently is the issue of whether a single title to land may be sub-divided, where the original single title has been purchased under a SMSF limited recourse borrowing arrangement. This assumes the loan is still being repaid and while the land continues to be held on trust.
For trustees who currently hold vacant land under a limited recourse borrowing arrangement, it’s been a difficult one to resolve. Whilst sub-division did appear to be allowed under the former rules s 67(4A), clarification has been required as to whether the recent changes to the super borrowing laws have altered the position. As you’ll see below, the ATO has now clarified its position.
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A recent interpretative decision by the ATO (ATO ID 2010/162) has caused some comment in the self managed superannuation industry, as on first look it appears that it allows a related party of a SMSF (say a member, or a member relative) to lend money to a SMSF under a limited recourse borrowing arrangement, and to do so under terms that are favorable to the SMSF. For example, say a member of a SMSF lends money to their SMSF under a limited recourse borrowing arrangement, but only charges the fund a very low interest rate, well below the normal market “arms length” rate.
by Townsends Business & Corporate lawyers
The Federal Government has affirmed its commitment to the SIS provisions which allow superannuation funds to borrow, but has fine-tuned the law.
The Superannuation Industry (Supervision) Amendment Bill 2010 has just been introduced to Parliament with the stated intention of ‘reducing the risks for superannuation funds investing in limited recourse borrowing arrangements’.
The Bill effectively re-writes the existing provisions, with s.67(4A) being repealed and two new sections, section 67A and section 67B, being substituted.
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