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Date of article: 22 September 2010
Last updated: 22 September 2010

SMSF limited recourse borrowing arrangement - update

The SMSF borrowing arrangement provisions in the Superannuation Industry (Supervision) Act 1993 (the SIS Act) have been changed. From 7 July 2010:

  • Section 67(4A) has been repealed and replaced with new section 67A and 67B with the name changed from "instalment warrants" to "Limited recourse borrowing arrangements".
  • Explicitly defines the interpretation of acquirable asset in the singular in the form of "single acquirable asset" to narrow the scope, especially in relation to shares and other securities.
  • The SMSF can refinance the limited recourse borrowing.
  • Associated expenses in acquiring the underlying asset can be included as part of the borrowing – for example: conveyancing fees, stamp duty, brokerage or loan establishment costs.
  • Explicitly protect fund assets by limiting the rights of the lender or any other person against the SMSF trustee to the acquirable asset.

Single acquirable asset

The new rules require that 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).

A collection that can be treated as a single 'acquirable asset' include:

  • a collection of shares of the same type in a single company - for example, a collection of ordinary shares in X Ltd.
  • a collection of units in a unit trust that have the same fixed rights attached to them;
  • a collection of economically equal and identical commodities - for example, a collection of gold bars, irrespective of whether they might, for example, have different serial numbers.

A collection that would not be permissible include:

  • a collection of shares in a single company that have different rights - for example, ordinary and preference shares.
  • a collection of units in a unit trust of different classes that have different rights attached to them or are potentially subject to differing trustee discretion;
  • a collection of shares in different entities.

Protecting fund assets

Developments in the lending practices have led to some lenders of limited recourse borrowing requiring the fund trustees or members to provide guarantees to reduce the lender’s risk.

The new arrangement will protect fund assets by limiting the rights of the lender or any other person (including guarantor) against the SMSF trustee as a result of a default on a borrowing or charges related to the borrowing to rights relating to the acquirable asset.

Reference: the amending legislation is the Superannuation Industry (Supervision) Amendment Act 2010; the bill is the Superannuation Industry (Supervision) Amendment Bill 2010.

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