The final SMSF ruling SMSFR 2012/1 - Self Managed Superannuation Funds: limited recourse borrowing arrangements - application of key concepts was released in May.
The ruling explains the application of key concepts for the purposes of the limited recourse borrowing arrangement (LRBA) provisions for SMSFs. The LRBA provisions provide an exception to the prohibition on trustees of super funds borrowing, or maintaining an existing borrowing, of money. The borrowing prohibition is designed to limit the risk of super fund investment. These provisions are found in sections 67A and 67B of the SISA.
The key concepts are explained, primarily in terms of real property assets although some mention is made of machinery, equipment and furnishings. It covers:
- what an 'acquirable asset' and a 'single acquirable asset' are
- when an asset is maintained or repaired and when it is improved
- whether improvements or alterations result in a different (replacement) asset.
The views in the ruling apply to arrangements entered into on or after 7 July 2010.
While the views expressed in this final ruling are consistent with those in the draft ruling, the final is more favourable. Minor modifications to the final ruling include:
- an explanation dealing with the characterisation of the asset in existence at the time when it is acquired, to assist in determining what the relevant single acquirable asset is
- clarification to more clearly define what a repair is versus an improvement (while the general approach taken in the draft ruling to distinguish between repairs and improvements has been maintained, the discussion has now been simplified)
- additional examples about whether improvements result in the single acquirable asset becoming a different asset
- additional examples that cover:
- rules around dual titles acquired under one LRBA
- advice about property development and tenants making improvements to the property
- contracts for the acquisition of a yet to be constructed house on land
- off-the-plan property purchases.
This ruling will help ensure that you as an SMSF trustee (and other stakeholders) understand the LRBA requirements. You can only enter into such an arrangement if it is consistent with the investment strategy of your fund and if the governing rules of your SMSF allow you to borrow. As such, you should always consider the quality of the investment you are making and whether your fund can meet all of the future obligations under the arrangements.
You need to understand that a ruling only provides guidance at a broader level. It may be necessary to seek further advice from us. You can download the Request for self-managed superannuation fund specific advice form and use it to request specific advice about how the super law applies to a particular transaction or arrangement for your SMSF.
If you borrow on behalf of your SMSF to invest in property, you must ensure that you fully understand and comply with the relevant borrowing requirements. If an arrangement does not meet these requirements it would contravene the borrowing prohibition and place at risk your SMSF's status as a complying super entity.
Before entering into any borrowing arrangement, seek independent professional advice from sources other than the individual or organiser promoting the investment. You need quality advice from your accountant or financial advisers if you are to stay within the rules and maintain the viability of your fund.
While we and ASIC do focus on making sure advisers and promoters do the right thing, you as SMSF trustee are ultimately responsible for entering into and operating correct borrowing arrangements. Severe penalties can apply for getting it wrong, so you must be careful.
Last Modified: Wednesday, 29 August 2012