Limited recourse borrowing arrangements by self-managed super funds - questions and answers

General prohibition on borrowing

Subject to limited exceptions allowed under the Superannuation Industry (Supervision) Act 1993 (SISA), trustees of SMSFs are prohibited from borrowing money.

Advice about the general prohibition and a list of exceptions is given in self- managed super funds ruling SMSFR 2009/2 Self Managed Superannuation Funds: the meaning of 'borrow money' or 'maintain an existing borrowing of money' for the purposes of section 67 of the Superannuation Industry (Supervision) Act 1993.

Amendments to the super law that applied from 24 September 2007 - limited recourse borrowing arrangements

From 24 September 2007 super funds could invest in certain limited recourse borrowing arrangements involving borrowing money to acquire a permitted asset. Those arrangements must meet the conditions set out in former subsection 67(4A) of the SISA.

Those rules continue to apply to limited recourse borrowing arrangements that were entered into before 7 July 2010, but new rules apply to new arrangements.

The rules apply to all regulated funds, not just SMSFs; however, this document only provides guidance in respect of the application of the law to SMSFs.

How is the ATO dealing with those SMSFs that invested in instalment warrant products before 24 September 2007?

If you are a trustee or director of an SMSF and you invested before 24 September 2007 in an instalment warrant that former subsection 67(4A) of the SISA allows, we will not issue a notice stating your fund is a non-complying fund solely on the basis of the investment.

However, if you invested before 24 September 2007 in an instalment warrant product that does not meet the requirements of former subsection 67(4A), we will decide on a case-by-case basis what action will be taken.

Amendments to the super law that apply from 7 July 2010 - changes for limited recourse borrowing arrangements

The super laws have been amended for limited recourse borrowing arrangements by super funds entered into on or after 7 July 2010 so that:

• super fund assets are better protected in the event of a default on a borrowing
• the asset within the arrangement can only be replaced by a different asset in very limited circumstances specified in the law
• super fund trustees cannot borrow to improve an asset (for example, real property)
• the borrowing is permitted only over a single asset or a collection of identical assets that have the same market value
• the asset within the arrangement is not subjected to a charge other than to the lender in respect of the borrowing by the super fund trustee.

The new rules are in section 67A and section 67B of the SISA.