Limited Recourse Borrowing Arrangement (LRBA)

Draft look-through rules for SMSF LRBAs, instalment warrants

Treasury draft look-through rules for instalment warrants and SMSF LRBAs (Limited Recourse Borrowing Arrangements)

Update: The Tax and Superannuation Laws Amendment (2015 Measures No. 2) Bill 2015, including look-through tax treatment for SMSF LRBAs, has passed both houses of Parliament. The bill may have changed since the draft was released. Treasury has yet to publish consultation submissions received.

The Treasury has released an exposure draft of legislation to enact ‘look-through’ tax treatment of instalment warrants, including SMSF Limited Recourse Borrowing Arrangements (LRBAs).

The draft bill would amend the Income Tax Assessment Act 1997 to look-through an instalment warrant or LRBA trust so that all income tax consequences of the underlying asset would flow-through to the investor, not the trustee.

The Treasury says that “long-standing industry practice” has been to ignore the trust structure in instalment warrants and LRBAs, and treat the investor as the owner of the asset. The purpose of the exposure draft is to “remove any uncertainty about how the law applies.”

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ATO ID 2014/39, 2014/40: 0% interest LRBAs & non-arm’s length income

The ATO has issued two decisions dealing with 0% interest rate Limited Recourse Borrowing Arrangements (LRBAs) leading to non-arm’s length income, ATO ID 2014/39 and ATO ID 2014/40. Update: the ATO has withdrawn these decisions, replacing them with ATO ID 2015/27 and 2015/28. Concern over 0% interest-rate LRBAs grew earlier… Read More »ATO ID 2014/39, 2014/40: 0% interest LRBAs & non-arm’s length income

ATO to issue Interpretative Decisions on 0% interest LRBAs

ATO Interpretative Decisions (ATOID) 0% LRBAs: SPAAThe ATO is preparing to issue two new Interpretative Decisions dealing with 0% interest Limited Recourse Borrowing Arrangements (LRBAs) leading to non-arm’s length income for SMSFs, according to SPAA.

The ATO is of the view that LRBA loans at 0%, or other non-commercial rates of interest, means that income from the assets under the LRBA is non-arm’s length income. Non-arm’s length income is taxed at 45% or 47% depending on the year, due to the Temporary Budget Levy.

The November meeting of the Superannuation Industry Relationship Network (SIRN) included a discussion with the ATO about the “potential publication” of two ATO Interpretative decisions on LRBAs, according to SPAA.

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Cross-insurance in an SMSF breaches SISR 4.07D: ATO

SMSF Cross-insurance SISR 4.07D ATOThe ATO has issued some guidance on how SIS regulation 4.07D, which changes what types of insurance an SMSF may hold, applies to cross-insurance strategies.

One area in particular where SMSFs may have used cross-insurance was in relation to property. The trustees of an SMSF which holds property may not wish to sell the property when a member dies in order to fund the payment of a death benefit. This is particularly the case where the property was part of a Limited Recourse Borrowing Arrangement (LRBA) or business real property leased to the business of a member.

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Spike in LRBAs a result of ATO change to statistics

Changes to how the ATO reports statistics for SMSF Limited Recourse Borrowing Arrangements has resulted in a dramatic increase in the 2013/14 figures. However this really reflects a underlying trend, instead of a actual spike in LRBAs.

These statistics are contained in the ATO Self-managed super fund statistical report – June 2014, which includes details of the June 2014 quarter, along with new details of the 2012/13 financial year.

Changes to reporting of LRBAs

In the June 2014 statistics the ATO has made changes to the reporting of Limited Recourse Borrowing Arrangements (LRBAs), resulting in the marked jump as seen in the graph below. This means that the statistics going forward will be more reliable, but longer term comparisons are not accurate. The changes resulted in a revision to earlier figures, raising the LRBAs from “$2.6 billion in 2013 to $8.3 billion,” according to the ATO.

SMSF Limited Recourse Borrowing Arrangements LRBAs 2009-2014

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ATOs stance on 0% LRBAs reinforced by more private rulings

ATO Private Binding Rulings - 0% LRBAs and non-arm's length incomeThe ATO has issued a number of new Private Binding Rulings with the view that 0% limited recourse borrowing arrangements by SMSFs will result in non-arm’s length income.

In April the ATO surprised some when it issued a Private Binding Ruling (PBR)  that said a 0% LRBA arrangement would result in the income earned from the asset being non-arm’s length income, and so taxed at 45%.

Since then the ATO has issued a number of further rulings with the same finding, indicating that it is a broader view held by the ATO rather than one only applicable to the individual situations of a particular case. Some of these private rulings seem to be for arrangements already in place, perhaps by SMSF trustees concerned that their strategies might not have the desired result?

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SPAA announces SMSF LRBA lender & adviser guidelines

SPAA SMSF Limited Recourse Borrowing Arrangements (LRBAs) guidelines - advisers and lendersSPAA has released guidelines for lenders and advisers working with SMSF Limited Recourse Borrowing Arrangements (LRBAs), with NAB the first bank to sign up to use the guidelines and other major lenders in the “pipeline”.

SPAA CEO Andrea Slattery says that, with the release of the guidelines, “Government and regulators can have a high degree of confidence that LRBAs are being used appropriately and that the industry has best practice guidelines for lending and advice in place.”

SPAA LRBA Lenders Guidelines

According to SPAA the LRBA guidelines for lenders are “intended to establish banking industry standards” to work with other lending policies. The guidelines include items such as:

  • Seeking acknowledgement from the SMSF trustees that they were recommended to seek expert advice
  • SMSF trustee to certify the SMSF is complying with SIS requirements
  • Lenders to provide information to trustees, including:
    • Details of the LRBA structure
    • “Advantages/risks of LRBAs”

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SMSF real estate investment advice needs regulation

SMSF & Superannuation NewsThe Bank of Queensland, in its submission to the Senate committee investigating proposed changes to the FoFA reforms, has raised the issue of increased regulation to protect consumers, including SMSF real estate investors, from property promoters. Calling the different regulatory approaches between real estate and other investments an “anomaly” BOQ recommends that “advice on the purchase of real estate, other than for owner occupiers, be included in the definition of financial advice”. This would provide a “consistent framework” and there is no “valid reason for the financial services licensing system not to apply to advice with respect to real estate investments”. Part of this concern comes from BOQ seeing unregulated real estate investment advice driving consumers into SMSFs which are inappropriate for them, including because the “fund too small to be economic” or the “consumer is not equipped to be a trustee”.

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