Limited Recourse Borrowing Arrangement (LRBA)

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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ATO exemption – LRBAs and In-House Assets

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)

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SMSF LRBA: 0% Interest can equal 45% Tax

PercentThe 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.”

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