In the past self managed superannuation funds (SMSF) were generally not allowed to borrow. This changed in 2007 with the implementation of instalment warrant borrowing. In June 2010 the rules were changed again and so was the name. The arrangements are now known as “limited recourse borrowing arrangements”.
The basic principles which apply are:
- The SMSF borrows money from a lender under an arrangement where, if the SMSF defaults, the lender can only exercise its recovery rights in relation to the asset which was purchased with the borrowed funds
- The borrowed money must be used to purchase that asset and the asset must be a single asset or single class of assets. The ATO has taken the view that in relation to real estate a single asset means a single title. As a result many apartments which have car parks on a separate title cannot be purchased under this arrangement
- The asset must be an asset which the SMSF would have been allowed to purchase having regard to the usual superannuation investment rules
- The asset must be held on trust for the superannuation fund by a separate custodial entity and the SMSF is the beneficiary of this trust. The trust is often referred to as a “bare trust” or “security trust”
- The SMSF must have the right to take a transfer of the asset after making one or more payments. That is once the SMSF pays off the loan the asset can be transferred to it. Provided all appropriate steps are taken this transfer should not attract stamp duty or capital gains tax
- Replacing the asset is only allowable in very limited circumstances. As a result improvements to real estate purchased under this arrangement are prohibited
It is essential that the ownership entity and structure are established correctly at the time the asset is acquired. Failure to do so may result in unnecessary stamp duty and capital gains tax issues.
Please contact Janelle Brown for further information.