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

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?

Arrangements entered into on or after 24 September 2007 and before 7 July 2010

Yes. When improvements materially alter the character of the original asset, they create a replacement asset for the purposes of subsection 67(4A) of the SISA. Under subsection 67(4A), the replacement asset is not limited to any particular type of asset but must be an asset that the SMSF trustee is not prohibited from acquiring. Assuming that the original property was an asset that the SMSF trustee was permitted to acquire, the improved property will be a permitted replacement asset.

If the terms of a limited recourse borrowing arrangement allow the SMSF trustee to make drawdowns, then any drawdowns must be used for the acquisition of the original asset or its permitted replacement.

Drawdowns to pay for capital improvements to the original asset meet this test, as do drawdowns to capitalise interest, maintain the asset and meet other costs of the arrangement. However, an SMSF trustee cannot make a drawdown to extract cash from the arrangement.

SMSF trustees must not attach an existing fund asset to the real property or otherwise subject an existing fund asset to a charge under the arrangement.

For more information, refer to Can an SMSF trustee borrow under a limited recourse borrowing arrangement to build a house on vacant land owned by the fund?

Arrangements entered into on or after 7 July 2010

No. The super law applying to these arrangements specifically prohibits borrowing to make improvements under subparagraph 67A(1)(a)(i) of the SISA.

However, drawdowns to capitalise interest, maintain the asset and meet other costs of the arrangement continue to be allowed.

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?