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

Does a drawdown from a credit facility give rise to a new borrowing?

Yes. The Commissioner considers that each drawdown of funds from a loan facility or similar arrangement constitutes a separate borrowing, even if the facility or arrangement makes provision for redraws arising from earlier repayments. This view is more fully explained in paragraph 93 of 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.

The terms of a single limited recourse borrowing arrangement may allow multiple drawdowns by the investor. Each drawdown must be reviewed to determine whether the borrowing meets the requirements of the super law applying to the particular arrangement.

If a drawdown is put to a purpose that does not meet the requirements of the super law - for example, the cash is put into a member's account - there is a contravention of the super law (specifically, subsection 67(1) of the SISA). Conversely, if the drawdown is put to a permitted purpose, such as the capitalisation of interest, then it does not result in a contravention of the super law.

Sections within The loan and the lender

• Is an SMSF allowed to borrow from a related party?
• Does interest on a borrowing from a related party need to be at commercial rates?
• Does the arrangement entered into by the SMSF trustee actually involve a borrowing?
• Can a related party borrow on a full recourse basis and on-lend the money to the SMSF under a limited recourse borrowing arrangement at a higher rate of interest?
• Does a drawdown from a credit facility give rise to a new borrowing?
• For real property held by the holding trust in a limited recourse borrowing arrangement, can an SMSF trustee draw down under the arrangement to make capital improvements to the real property without contravening the super law?
• Does an arrangement that permits capitalisation of interest or other borrowing charges satisfy the super laws?