Recap on SMSF limited recourse borrowing arrangements

Recap on SMSF limited recourse borrowing arrangements
Recap on SMSF limited recourse borrowing arrangements


The last 12 months have been a roller coaster ride for SMSF limited recourse borrowing arrangements. I thought I’d take the opportunity to re-cap what’s happened.


The biggest change — or more accurately the biggest non-change — is the government’s decision not to action the recommendation coming out of the Financial System Inquiry.

The final FSI report — released in December 2014 — had recommended that the government:

[r]emove the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.

More specifically, it stated:

Government should restore the general prohibition on direct borrowing by superannuation funds by removing Section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) on a prospective basis.

It described the problem as follows:

… growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system … the Inquiry notes an emerging trend of superannuation funds using LRBAs to purchase assets. Over the past five years, the amount of funds borrowed using LRBAs increased almost 18 times, from $497 million in June 2009 to $8.7 billion in June 2014.

Naturally, this was a cause for concern for many in the SMSF industry. Also, some felt that the recommendation unfairly targeted all LRBAs where only some or a minority posed any concern. Of course there are risks with any borrowing, but I have seen many SMSF trustees carefully plan and meticulously implement LRBAs which greatly added to an SMSF’s ability to provide retirement benefits. Such carefully thought out investments added only a commensurate amount of increased risk for the increased amount of return.

The recommendation was a particular concern for those SMSF trustees who had signed contracts to buy properties off-the-plan. With such purchases typically one must wait well over a year before the apartment is built and a bank is ready to execute loan documentation. If the government changed the law in the meanwhile, such SMSFs could have been left in a tricky position.

Luckily, the government has adopted a ‘wait and see’ approach. More specifically, on 20 October the government responded to the FSI as follows:

The Government does not agree with the Inquiry’s recommendation to prohibit limited recourse borrowing arrangements by superannuation funds.

While the Government notes that there are anecdotal concerns about limited recourse borrowing arrangements, at this time the Government does not consider the data sufficient to justify significant policy intervention.

Accordingly, LRBAs are still allowable … at least for the time being!

Bank policies

The last 12 months have seen a marked increase in difficulties in getting a bank to agree to lend to SMSFs. Some banks appear to flat out refuse to enter into new LRBAs for the acquisition of residential real estate. As at the date of writing, it is too soon to say with certainty, but due to the government not banning LRBAs (as set out above) it is hoped that the major banks will re-enter the residential LRBA market.

New tax legislation

The passing of the Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 (Cth) was a positive change. It clarifies that a look through approach can be applied to the bare/holding trust that is a mandatory feature of LRBAs.

This new law inserted into the Income Tax Assessment Act 1997 (Cth) the concepts of an ‘instalment trust’ and an ‘instalment trust asset’. These include respectively an LRBA bare/holding trust and the asset that is owned via the bare/holding trust.

The legislation goes on to provide that where an investor (eg, an SMSF) has a beneficial interest in an instalment trust asset under an instalment trust, the asset is treated as being the investor’s asset instead of being an asset of the trust.

It gives the following examples:

  • A dividend in respect of the asset is paid to the instalment trust (ie, the bare/holding trustee). Under the new law the dividend is treated as if it had been paid directly to the investor.
  • A trustee of an instalment trust (ie, the bare/holding trustee) disposes of the instalment trust asset. Under the new law any capital gain or loss is made by the investor, not by the trustee.

Also, although the changes were inserted into the income tax legislation, they also extend to GST. For example, the recently inserted s 235 820(5) of the Income Tax Assessment Act 1997 (Cth) contains the following example:

If the trustee [of the instalment trust] has a net input tax credit under the GST Act, the [SMSF] must apply the credit to reduce the investor’s cost base for the instalment trust asset (even if the [SMSF] is not registered or required to be registered for GST purposes).

In truth though, many were not too excited by the passing of the Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 (Cth) as it simply confirmed what has already been industry practice for many years.

Related party lending

Naturally, it is possible for the lender to an SMSF to be a related party.

In 2010, in Australian Taxation Office Interpretative Decision ATO ID 2010/162 the ATO stated that ‘there is no contravention of section 109 of the SISA if the terms [of a related party SMSF loan] are more favourable to the SMSF [than had the parties been at arm’s length].’

Then, the NTLG Superannuation Technical minutes of June 2012 record that the following two questions were put to the ATO:

If a related party lender offers a discounted rate of interest to an SMSF under a section 67A borrowing arrangement, would the discount be considered a contribution received by the SMSF?

Can an SMSF enter into a borrowing arrangement … with a related party if a zero rate of interest is charged by the related party lender and only principal repayments, with no imputed interest, are made throughout the loan term in accordance with the loan agreement?

The ATO answered both in terms favourable to taxpayers (ie, no to the first and yes to the second).

Further, in the general NTLG minutes of December 2012, the ATO stated:

The ATO position on low rate loan arrangements and LRBA is that that they do not generally invoke a contravention of the SISA, do not give rise to non-arm’s length income under section 295-550 of the Income Tax Assessment Act 1997 (ITAA), do not invoke Part IVA of the ITAA 1936 and are not considered to give rise to contributions to the SMSF just from that one fact alone.

Accordingly, many had read this as being a ‘carte blanche’ for low — or even nil — interest related party LRBAs. At DBA Lawyers we had never been a fan of such arrangements and of course ATO comments in NTLG minutes are not binding.

Then, in December 2014 the ATO released Australian Taxation Office Interpretative Decisions ATO ID 2014/39 and ATO ID 2014/40. These both considered related party LRBAs with nil interest being charged and both stated that the ATO’s view is that the arrangements did give rise to non-arm’s length income.

Accordingly, the position that DBA Lawyers has long been in favour of is now broadly well accepted by all, namely, that related party LRBAs should be on the same terms that would be agreed with an arm’s length lender.


The last year has shown that LRBAs are here to say (at least for the foreseeable future), but we must be just as careful as ever in their set up. This care includes ranging from ensuring that a bank will lend, up to ensuring that — where there is a related party — the terms of the loan are reflective of what is arm’s length.

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.


Bryce Figot is a lawyer at DBA Lawyers and can be contacted here.




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