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  • Limited recourse borrowing arrangements

    A limited recourse borrowing arrangement (LRBA) involves a self-managed super fund (SMSF) trustee taking out a loan from a third party lender. The trustee then uses those funds to purchase a single asset (or collection of identical assets that have the same market value) to be held in a separate trust.

    Any investment returns earned from the asset go to the SMSF trustee.

    If the loan defaults, the lender's rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF.

    This document:

    • provides general information about our current views on issues that trustees of self-managed super funds (SMSFs) may need to take into account when considering entering into an LRBA
    • provides guidance regarding the application of the Superannuation Industry (Supervision) Act 1993 (SISA) and related super rules to such arrangements
    • does not deal with tax issues other than general references when discussing the application of the super law.

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    Limited recourse borrowing

    If you already have an SMSF and are thinking of using limited recourse borrowing to make an investment, you need to consider if this is the right kind of investment for your SMSF.

    Limited recourse borrowing loans may be presented to you in various ways. You may be given a product disclosure statement that talks about property warrants or instalment warrants. These often package property, shares or some other asset with a loan product that meets the limited recourse borrowing requirements. Your financial adviser may also offer to set up a limited recourse borrowing facility for you.

    As with any investment decision, evaluate exactly what you are being offered. Some questions you might ask include:

    • Who will be the lender and what will happen if borrowing rates reduce or rise?
    • Can the loan be called in early?
    • Can your loan be sold to another party and the terms of the loan altered?

    Don't decide until you understand how the investment works.

    Is the asset being offered of good quality and what is the value of the asset you intend to buy? If you are given a valuation, can you check that the valuation is reasonable? You can check online or in the paper to find the price of similar assets.

    Look at the fees and costs of the loan. If shown as a percentage, work out how much they amount to in dollar terms. Setting up a limited recourse borrowing investment can be costly. The set-up costs and ongoing interest and fees may wipe out potential profits.

    Will you be paying commissions? Sometimes the person who arranges your loan may receive a commission for the life of the loan. If someone sources a property or asset for you, they may also receive a payment. These may be in addition to the fees and costs you are paying for the loan arrangement. Are you comfortable with this?

    Does the asset need to be insured and if so, will the SMSF have the money available to pay insurance costs each year? If the asset is a property to be leased or rented will your SMSF have enough money to pay maintenance costs or make repayments if the property is unoccupied for a period of time and no rental money is received?

    LRBAs are generally long-term investments. Consider whether your SMSF will be able to maintain the loan repayment and fees over that term. Will your SMSF have enough money left over to pay the other expenses of the fund such as accountant and auditor fees? Also consider what would happen if one of the members wants to leave the fund or retire and take their money out or start a pension?

    Your SMSF can still hold an asset under an LRBA while it is paying a pension to one or more of its members. However, if fewer or no contributions are made, will the SMSF have enough money available to continue repaying the loan and meet its pension payment requirements? Will the asset purchased with the loan have to be sold? Can the loan asset be sold quickly?

    Most importantly, we recommend that you seek advice from a qualified, licensed professional to help you decide if limited recourse borrowing is right for your SMSF.

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    Trustee considerations

    Trustees should always consider the quality of the investment they are making and whether their fund can meet all future obligations under the arrangement. A trustee of an SMSF can only enter into such an arrangement where it is consistent with the investment strategy of the fund.

    The governing rules of an SMSF must allow the trustee of the fund to borrow before any instalment warrant-type arrangement or any other LRBA can be entered into.

    Help is available

    You can apply for self-managed super funds specific advice (SMSFSA) about:

    • your own SMSF's affairs
    • another person's SMSF's affairs if you are their agent or legal personal representative.

    An SMSFSA sets out the Commissioner of Taxation's opinion on the way the super laws apply, or would apply, to your SMSF about a specified arrangement or circumstance.

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    General prohibition on borrowing

    Subject to limited exceptions allowed under SISA, trustees of SMSFs are prohibited from borrowing money.

    Advice about the general prohibition and a list of exceptions is given in the ruling SMSFR 2009/2.

    See also:

    • SMSF 2009/2 Self-Managed Superannuation Funds: the meaning of 'borrow money' or 'maintain an existing borrowing money' for the purpose of section 67 of the Superannuation Industry (Supervision) Act 1993

    Amendments to super law applied from 7 July 2010

    The super laws were amended for LRBAs 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 recourse of the lender or of any other person against the superannuation fund trustee for default on the borrowing is limited to rights relating to the acquirable asset.

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

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    Amendments to the super law applied from 24 September 2007 to 6 July 2010

    From 24 September 2007, super funds could invest in certain LRBAs 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 LRBAs 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 information only provides guidance about the application of the law to SMSFs.

    SMSFs that invested in instalment warrant products before 24 September 2007

    If you are a trustee or director of an SMSF that invested in an instalment warrant allowed under former subsection 67(4A) of the SISA before 24 September 2007, 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.

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      Last modified: 15 Jul 2021QC 20439