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  • Super law requirements for LRBA by super trustees

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    Arrangements entered into on or after 7 July 2010

    An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies each of the following conditions:

    • The borrowed monies are used to acquire a single asset, or a collection of identical assets that have the same market value (that are together treated as a single asset), which the fund is not otherwise prohibited from acquiring (called the 'acquirable asset'). The new law makes it explicit that borrowed money applied to expenses incurred in connection with the borrowing or acquisition (such as loan establishment costs or stamp duty), or expenses incurred in maintaining or repairing the acquirable asset, is allowed.
    • The borrowed monies are not applied to improving an acquirable asset.
    • The acquirable asset is held on trust (the holding trust) so that the SMSF trustee receives a beneficial interest in the asset.
    • The SMSF trustee has the right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest.
    • Any recourse that the lender, or any other person, has under the arrangement against the SMSF trustee is limited to rights relating to the acquirable asset. This limitation applies to rights directly or indirectly relating to a default on the borrowing and related charges or directly or indirectly relating to the SMSF trustee's rights about the acquirable asset (for example, rights to income from the asset).
    • The acquirable asset is not subject to a charge other than as provided in relation to the borrowing by the SMSF trustee.
    • The acquirable asset can be replaced by another acquirable asset that the SMSF is not otherwise prohibited from acquiring, but only in very limited circumstances as listed in the super law.

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

    An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies each of the following conditions:

    • The borrowed monies are used to acquire an asset that the fund is not otherwise prohibited from acquiring.
    • The asset acquired (or a replacement asset) is held on trust (the holding trust) so the fund receives a beneficial interest in the asset.
    • The SMSF has the right to acquire legal ownership of the asset (or, if applicable, the replacement asset) by making one or more payments after acquiring the beneficial interest.
    • Any recourse the lender has under the arrangement against the SMSF trustee is limited to rights relating to the asset acquired (or, if applicable, the replacement asset). For example, the lender can have the right to recover outstanding amounts where there is a default on the borrowing by repossessing or disposing of the asset being acquired under the arrangement, but cannot have the right to recover such amounts through recourse to the fund's other assets.

    Replacing acquirable assets in an LRBA

    The circumstances in which an acquirable asset in an LRBA can be replaced are listed in section 67B of the SISA.

    Regulations can be made to allow for replacement in additional circumstances, but as at 28 April 2014 no regulations have been made for this purpose. The circumstances listed in section 67B are:

    • A share in a company (or collection of such shares) can be replaced by a share (or collection of such shares) in the same company if, at the time of replacement, the original asset and replacement have the same market value (for example, if there is a share split). (Subsection 67B(3)).
    • A unit in a unit trust (or collection of such units) can be replaced by a unit (or collection of such units) in the same unit trust if, at the time of replacement, the original asset and replacement have the same market value. (Subsection 67B(3)).
    • If the original asset is an instalment receipt that converts to a share or collection of shares in a company, then that share (or collection of shares) is allowable as a replacement asset. (Subsection 67B(4)). For these purposes an 'instalment receipt' is defined to mean an investment under which a listed security is held in a trust until the purchase price of the security is fully paid and the security, and property derived from the security, is the only property of that trust. (Subsection 10(1)).
    • A share in a company (or collection of such shares) can be replaced by a share (or a collection of such shares) in another company if the replacement occurs because of a takeover, merger, demerger or restructure of the first company. (Subsection 67B(5)).
    • A unit in a unit trust (or collection of such units) can be replaced by a unit (or collection of units) in another unit trust if the replacement occurs because of a takeover, merger, demerger or restructure of the first trust. (Subsection 67B(5)).
    • A share in a company (or collection of such shares) can be replaced by a stapled security (or collection of such securities) if the replacement occurs under a scheme of arrangement of the company - for example, as part of a restructure. The stapled security must consist of a share (or a single collection of shares of the same class) stapled together with a unit (or a single collection of units of the same class) in a unit trust. (Subsection 67B(6)).
    • A unit in a unit trust (or collection of such units) can be replaced by a unit (or collection of units) in that trust if the replacement occurs as a result of an exercise of a discretion granted to the trustee of that unit trust under the trust deed (for example, a managed investment scheme trustee exercises a discretion to split or consolidate units). (Subsection 67B(7)).

    When an LRBA does not satisfy all required conditions

    If the required conditions are not satisfied, borrowing money under the arrangement will result in a contravention of one or more of the super laws. Such a contravention may have civil or criminal consequences.

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      Last modified: 28 Aug 2019QC 20439