ATO exemption – LRBAs and In-House Assets

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SMSF borrowing property - limited recourse borrowing arrangement LRBAThe ATO recently issued a Determination so resolve an issue where the In-House Asset rules could apply to an Limited Recourse Borrowing Arrangement (LRBA) which was otherwise complying with both the SIS Act/Regulations and ordinary practice.

The Determination, the Legislative Instrument Self Managed Superannuation Funds (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014 (2014/SPR/0008), is issued under s71(f) of the SIS Act, which empowers the regulator to make determinations that an asset is not an In-House Asset.

At issue is the exemption provided by s71(8) of the SIS Act. This sub-section provides an exemption from the In-House Asset rules where an SMSF has an investment in a Custodian Trust (or Holding Trust as it is referred to by the ATO) as part of an LRBA. However, as set out in the Explanatory Statement, this exemption does not cover certain circumstances:

  • Where a contract has been entered into but the borrowing has yet to commence (Paragraph 19)
  • Where a borrowing has been entered into, but the custodian trust does not yet hold the asset – such as where a deposit it made for an off-the-plan unit (Paragraph 21)

As noted in the Explanatory Statement to the Legislative Instrument, such a Custodian Trust will usually be a Related Trust of the SMSF. If there was no exemption provided, the investment in the trust would be an In-House Asset of the fund. Given that SMSFs are currently limited to 5% of total market value being held in In-House Assets, and that LRBAs are often used to purchase large investments, without an exemption many SMSFs would breach the In-House Asset limit. This would be a breach of the SIS Act and would likely require the un-winding of the LRBA and sale of the asset purchased.

The Determination provides exemptions from the In-House Asset rules, but with conditions. The the Explanatory Statement says that the exemptions are not meant to “provide indefinite relief from the in-house asset rules” and that there should be no “unreasonable delays”. The application of the exemptions is dependent on it being “reasonable to conclude” that:

  • The borrowing will occur, or
  • The asset will be held by the trust

In addition these exemptions require that:

  • “the only property of the related trust will be the asset referred to in paragraph 71(8)(c); and”
  • “that asset would not be an in-house asset of the fund if directly held by the SMSF. ”

There is a second clause in the Determination providing relief from the In-House asset rules where the borrowing of an LRBA has been repaid, but the asset has yet to be transferred to the SMSF (Paragraph 32).

The Legislative Instrument applies from 24 September 2007 – the date of effect of the LRBA provisions.

The full text of the Determination and the Explanatory Statement are available at ComLaw. The ATO announcement can be found here.

 

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