Comments by the then Assistant Treasurer Arthur Sinodinos seem to have put to an end to the long-expected review into SMSF Limited-Recourse Borrowing Arrangements (LRBAs). However there is still support for such a review in the submissions so far to the Financial System Inquiry.
The Cooper Review (Super System Review) made the following recommendation in regards to SMSF borrowing and LRBAs:
“Recommendation 8.10: The 2007 relaxation of the borrowing provisions and the consumer protection measures that have recently been announced should be reviewed by government in two years’ time to ensure that borrowing has not become, and does not look like becoming, a significant focus of superannuation funds.”
As the Cooper Review was released in 2010 this would have meant a review of LRBAs by 2012. It appears from the Review Paper that the thinking behind the above recommendation was that the changes to SMSF borrowing were “still recent”. The announcement by the government of the intention to make LRBAs Financial Products under the Corporations Act seems to have also influenced the Panels thoughts on the matter. However it is now over four years since that announcement and the proposed changes have not been implemented. The Panel did seem to be concerned about SMSFs borrowing, believing it to be “inconsistent with Australia’s retirement policy” and wanted to ensure that “borrowing does not become a significant focus of SMSFs”.
A recent ATO Tax Determination (TD 2014/7) has provided some guidance to the practicalities of asset segregation as it applies to a bank account.
Update: the ATO has issued an addendum to the Determination: ATO reverses position on SMSF actuarial certificate rules.
Update: the ATO has announced ‘compliance flexibility’ for small businesses which miss the SuperStream deadline.
SuperStream is part of the Stronger Super reforms designed to improve administrative efficiency in the superannuation system and reduce costs, partly by moving from paper-based records to electronic transactions. In stages, beginning 1 July 2013, APRA super funds, SMSFs and large and small employers will transition to using SuperStream for exchanging information regarding superannuation contributions and rollovers. The following important SuperStream dates come from the Superannuation Data and Payment Standards 2012 and ATO publications:
The 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)
The ATO has recently issued a Private Binding Ruling which casts some doubt on 0% interest-rate limited-recourse borrowing arrangements (LRBAs). Should this interpretation be correct SMSFs with LRBAs at 0%, or indeed below-market rates of interest, could owe 45% tax on income relating to the LRBA Investment. Since 2010, based on a number of binding and non-binding ATO sources, there has been increasing comfort with the SIS compliance of related-party LRBAs, including at below-market rates of interest. This broader interest came as a result of minutes of the National Tax Liaison Group (NTLG) Superannuation Technical Sub-group meeting in June 2012, where the ATO said that such an arrangement could be consistent with s67A and s109:
“Yes. A lower than market interest rate or the absence of a requirement to pay interest on money loaned to the trustee by a related party will not prevent the arrangement from being a borrowing for the purposes of section 67A of the SISA”
“a fact that the borrowing is interest free does not cause a contravention of paragraph 109(1)(b) of the SISA as that fact does not make the terms and conditions of the borrowing more favorable to the related party lender than would be reasonably expected if the parties were dealing with each other at arm’s length in the same circumstances.”