• Lenders recourse and charging the asset being acquired

    Will granting the lender a right of recourse over the underlying asset lead to a contravention of the prohibition against charging a fund asset?

    The granting to the lender of a right of recourse to the underlying asset at the same time that the trustee of an SMSF acquires the beneficial interest in the asset is a necessary feature of an LRBA contemplated by the super law.

    Granting of such a right in these circumstances will not contravene the existing prohibition in the law against giving a charge over a fund asset, provided that the arrangement complies with all the conditions of the super law.

    Can an SMSF member provide a personal guarantee to the lender in an LRBA?

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

    Yes. The recourse of the lender against the SMSF trustees in the event of a default on the borrowing must be limited to the asset that is being acquired under the arrangement. A third party may put up their own assets as a guarantee to provide additional security to the lender.

    It is not required that a third party guarantor waive their usual rights of indemnity against the principal debtor (the SMSF trustee) in the event of a call on the guarantee. However, SMSF trustees should carefully consider the risks to the assets of the SMSF (other than the asset being acquired under the LRBA) that an unlimited guarantee might represent. The rights of indemnity given in favour of a guarantor may be excluded or limited by the express terms of the guarantee.

    Arrangements entered into on or after 7 July 2010

    Yes, provided the guarantors rights against the principal debtor (the SMSF trustee) are limited to rights relating to the asset being acquired under the arrangement.

    Under the super law applying to these arrangements, the recourse of the lender or any other person against the SMSF trustees in connection with, or as a result of, a default on the borrowing (either directly or indirectly) must be limited to rights relating to the asset that is being acquired under the arrangement.

    This means, for example, that for an arrangement to meet the requirements of the super law, any guarantor must not have general rights of indemnity against the principal debtor (the SMSF trustee) that might crystallise in the event of a call on the guarantee. However, the guarantor may have rights of subrogation of the lender's rights (that is, the right to exercise the lender's limited rights of recourse to the asset being acquired under the arrangement) that might crystallise in the event of a call on the guarantee.

    Personal guarantees and contributions to the SMSF

    If a guarantor makes a payment to the lender under an arrangement where they have foregone their usual rights of indemnity against the principal debtor (the SMSF trustee) in respect of the guarantee, this is a contribution to the SMSF if it satisfies a liability of the SMSF. This might happen, for example, if the guarantor paid the borrowing and the acquirable asset was transferred to the SMSF trustee under the arrangement.

    In contrast, there is no contribution if the SMSF trustee has exercised a right to walk away from the arrangement (and has lost the acquirable asset to the lender) and has no further liability, but the lender still exercises a right to call on the guarantee for a shortfall after disposal of the original asset.

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    Can a related party to the SMSF give a mortgage to the lender over an asset of the related party?

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

    Yes. Under the super law the recourse of the lender against the SMSF trustees in the event of a default on the borrowing must be limited to the asset that is being acquired under the arrangement. However, a third party can mortgage one of their assets (in which the SMSF does not have an interest) to the lender to provide the lender with additional security.

    Arrangements entered into on or after 7 July 2010

    Yes, provided the related party or any other person has no rights of recourse against the SMSF trustee in the event that the mortgage is exercised by the lender (for example, if the SMSF trustee defaults on the borrowing), other than rights relating to the asset being acquired under the arrangement.

    Can the asset being acquired be used as security other than in respect of the borrowing by the SMSF trustee?

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

    SMSF trustees need to be careful that such a charge over the asset held in the holding trust does not contravene the law. For example, all of the SMSF trustee's dealings in respect of the arrangement must meet the arm's length requirements in section 109 of the SISA, no member or relative of a member can be financially assisted by the SMSF trustee using the resources of the SMSF, and the maintenance of the fund must be in accordance with the sole purpose test.

    There may be limited circumstances where such a charge does not result in a contravention of the SISA, but for the reasons given above we would not encourage it.

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    Arrangements entered into on or after 7 July 2010

    No. The super law (specifically, paragraph 67A(1)(f) of the SISA) applying to these arrangements prohibits any charge over the asset other than in respect of the borrowing by the SMSF trustee under the arrangement.

      Last modified: 08 Feb 2016QC 20439