Summary of ATO thinking on various SMSF borrowing issues
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) |
Notes:
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.
Jane Wilson says:
Hi Darren, could you point me in the right direction for an answer to this: I have a client who signed an offer and acceptance in his own name to purchase an off-the plan apartment. Now he wants to have the property in a SMSF. Can he do this? Wouldn’t the transfer be a related-party transaction?
Would appreciate the heads up on where to go, many thanks,
Jane.
February 16th, 2011 at 6:28 am
Darren Kingdon says:
Hi Jane,
It might be too late to unravel the contract that he has already entered into. That’s essentially a legal question. There may also be practical issues such as whether or not the deposit is forfeited, debt issues etc. If title ends up being issued in your client’s name and the property is not unencumbered business real property, it cannot be subsequently acquired by his SMSF.
Regards
Darren
February 17th, 2011 at 5:10 am
Toni says:
Hi Darren,
Can you help me with this question?
I have a block of land in my own name, can I transfer it into a smsf and then build a house with smsf money?
Regards
Toni
May 29th, 2011 at 5:24 am
Darren Kingdon says:
Hi Toni,
This first step would be to determine whether the block of land in question would qualify as business real property, as only these properties can be transferred into super from related parties. From the limited information available, this would seem unlikely, but feel free to contact me should you wish to discuss this matter further.
Regards,
Darren
June 1st, 2011 at 1:12 am
Matt says:
Hi Darren
If a SMSF wishes to refinance its loan from one lender to another, would the new lender be required to ensure that the previous SMSF lending arrangement complied with SISA, or merely that its own arrangement is compliant with SISA?
Many thanks and kind regards
Matt
June 9th, 2011 at 8:28 am
Liz Gibbs says:
Hi Darren
When is it OK for a SMSF to buy off the plan and take advantage of the borrowing rules and what steps must they follow
Thank you.
September 9th, 2011 at 4:21 am
Darren Kingdon says:
Hi Liz,
In my personal view, the timing of the borrowing in relation to the formation of the asset holds the key, but as you would appreciate, this matter has not yet settled.
Note the ATO is expected to release its public ruling on single acquirable asset by the middle of Sept 2011 so keep an eye out for this.
Regards,
Darren
September 12th, 2011 at 4:44 am
Andriy says:
Hi Darren,
Our SMSF recently purchased an asset and almost all SMSF’s money was spent. Now we have to pay a yearly tax and it appears we are short in cash.
When you say in your table above that SMSF can borrow money on favorable terms from related parties, does this mean that I can give my own money to the SMSF with, say, zero interest to pay tax and then get it back in 2-3 months when we are not short in cash?
If yes, are there any particular documentation requirements except the loan agreement?
Thank you
January 16th, 2012 at 12:03 pm