Changes to other laws relating to LRBAs
The arrangement and refinancing
Are only marketed instalment warrant products allowable for SMSFs under the limited recourse borrowing rules?
No. Borrowing is allowed under any arrangement that meets the requirements of the super law, not just financial products marketed as instalment warrants. Conversely, it does not automatically follow that a product marketed as an instalment warrant meets the conditions of the super law.
Are only instalment warrant investments over listed securities allowable for SMSFs under the limited recourse borrowing rules?
No. The rules allowing limited recourse borrowing are not limited to investments in instalment warrants traditionally offered by financial institutions where the underlying asset is a listed security. Other arrangements or products are allowed if they satisfy all of the requirements of the super law.
What changes to a borrowing or other attributes of an LRBA result in a new arrangement for the purposes of super law?
If the parties adopt a change to the terms or conditions of an arrangement (either expressly or by inference) that goes to the root of the arrangement - that is, it alters the character of the arrangement in a significant way - then there is a new arrangement from that time and the earlier arrangement has come to an end. If that change happened after 7 July 2010, the requirements of section 67A of the SISA apply to the arrangement.
Changes resulting in a new arrangement include:
- the borrowing under the original arrangement is refinanced - refer to:
- there is a borrowing (drawdown) that is inconsistent with the earlier arrangement - for example, borrowing to acquire an asset or class of asset clearly not contemplated under the original arrangement
- there has been a change to the ultimate beneficiaries of the arrangement resulting from selling a structure involving a pre-existing arrangement.
Example 1 : New arrangement
There is an LRBA that meets the requirements of former subsection 67(4A) of the SISA entered into by a corporate SMSF trustee and a private company lender before 7 July 2010. On or after 7 July 2010, new directors of the corporate SMSF trustee (and members of the SMSF) and new directors of the private company lender are appointed, replacing all of the former members. The Commissioner will treat the LRBA now controlled by the new ultimate beneficiaries as a new arrangement. The new arrangement must meet the requirements of section 67A of the SISA.
Example 2 : No new arrangement
There is an LRBA that meets the requirements of former subsection 67(4A) of the SISA entered into by a corporate SMSF trustee and a private company lender before 7 July 2010. On or after 7 July 2010 two new members of the SMSF are admitted as a result of changing family circumstances. The Commissioner will not treat the LRBA as a new arrangement on this basis alone.
End of example
Can an SMSF trustee refinance a limited recourse borrowing without contravening the super law?
Arrangements entered into on or after 24 September 2007 and before 7 July 2010, then refinanced on or after 7 July 2010
Yes, SMSF trustees can refinance the borrowing, but the refinanced arrangement must meet the requirements of the law applying to LRBAs entered into on or after 7 July 2010.
A new borrowing that takes the place of the old borrowing, such that the application of the new borrowing is solely to extinguish the previous borrowing and meet associated costs, satisfies the requirement that borrowed funds are applied for the acquisition of the relevant asset.
However, refinancing the borrowing is entering into a new limited recourse borrowing arrangement at the time of refinancing. Any arrangement refinanced on or after 7 July 2010 must meet the requirements of the super law (section 67A of the SISA) applying to arrangements entered into on or after 7 July 2010.
Where a new trust is created to hold the asset, SMSF trustees must ensure the asset is transferred directly to that new trust and that the SMSF does not temporarily obtain title to the asset at that time, otherwise a contravention of the super law will occur.
Arrangements entered into on or after 7 July 2010 and then refinanced at a later date
Yes, provided the re-financed arrangement meets the requirements of section 67A of the SISA.
Section 67A explicitly allows re-financing of a borrowing (including any accrued interest) under an arrangement if the new borrowing arrangement is over the acquirable asset from the first arrangement (including an asset from the first arrangement that is a replacement asset under section 67B of the SISA) and no other acquirable asset.
Where a new trust is created to hold the asset, SMSF trustees must ensure that the asset is transferred directly to that new trust and that the SMSF does not temporarily obtain title to the asset at that time, otherwise a contravention of the super law will occur.
Is every variation to the terms of a limited recourse borrowing regarded as a refinancing?
No. The question is whether a variation to the contract of borrowing led to the extinguishment of the previous borrowing and the creation of a new and different borrowing (a refinancing). This depends upon the nature and extent of the variation and the intention of the parties.
Example: Extension of borrowing
Suppose a borrowing is extended by a variation to the terms of a contract. An agreement to extend the period of the borrowing could be so inconsistent with the original agreement that it results in a new contract for borrowing. Some relevant factors are:
End of example
- whether the original loan agreement provided for the parties to agree to extend the term
- the period of the extension in relation to the period of the original loan
- whether other terms of the loan were changed by the later agreement.
In Roberts v I.A.C (Finance) Pty Ltd (1967) VR 231, the parties agreed to extend a three-year borrowing for a further two months. It was held the extension was not totally inconsistent with the terms of the original agreement as the variation left the terms and conditions of the original agreement in intact, except to the limited extent that the due date was extended by two months. As the contract was modified to a limited extent, the rights and obligations of the parties were not affected by the variation. In these circumstances, the loan extension did not discharge the original obligation to pay and create a new obligation to pay in its place.