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Intermediary limited recourse borrowing arrangements
The ATO has finalised SPR2020/D1 in relation to Intermediary Limited Recourse Borrowing Arrangements. The commencement date of this Determination is 24 September 2007 and applies to all Intermediary LRBA established from that date.
The Determination is made under Section 71(1)(f) of the SIS Act which allows the Regulator by legislative instrument to determine an asset is not an in-house asset (IHA) of the fund.
What are the changes?
Central to the changes is the provision that allows an SMSF with a valid LRBA to borrow indirectly through the holding trust (intermediary) as principal from a lender to acquire a single acquirable asset and the SMSF maintains the holding trustee’s borrowing. This closes an anomaly in the SIS Act which previously construed the holding trust of such an arrangement as an IHA of the fund.
An important condition that must be met to qualify for the Intermediary LRBA is that the deed which limits the rights of the holding trustee or any guarantors against the trustee of the fund in connection with default on the borrowing has to be disclosed to the lender.
This does not affect in any way the current practice under which the trustee of the SMSF directly undertakes the borrowing as principal, maintains the borrowing and provides the total purchase price of the acquirable asset out of its own funds and borrowed funds.
Under the new rules, the intermediary LRBA is an arrangement that meets the following requirements:
1. a holding trust is established with members of a fund being the only trustees or the only shareholders and directors of the corporate trustee (Holding Trustee);
2. the trustee of the fund is the only beneficiary of the holding trust;
3. the Holding Trustee holds an acquirable asset (Asset) on trust for the trustee of the fund, who is beneficially entitled to the Asset;
4. the asset is a single acquirable asset (as referred to in subsection 67A(1)) that the trustee of the fund is allowed to acquire under the SIS Act;
5. the Holding Trustee enters into a borrowing as principal with a lender with the borrowing secured by a mortgage over the Asset;
6. the contract or deed of borrowing between the Holding Trustee and the lender may not limit the lenders right of recourse, under the contract or deed, to only the Asset in the event of default;
7. the lender may require that personal guarantees are given as part of the Intermediary LRBA;
8. the arrangement is established by a legally binding deed(s) under which the trustee of the fund and the Holding Trustee agree for:
(i) the trustee of the fund to maintain all borrowing obligations entered into by the Holding Trustee in respect of the borrowing arrangement referred to in paragraph 5;
(ii) the trustee of the fund is absolutely entitled to any income derived from the Asset, less fees, costs, charges and expenses incidental to the acquisition holding or management of the Asset;
(iii) the trustee of the fund has the right to acquire the legal title of the Asset on completion of the borrowing referred to in paragraph 5;
(iv) the rights of the Holding Trustee or any Guarantors against the trustee of the fund following default on the borrowing referred to in paragraph 5 is limited to the Asset.
9. The documentation referred to in paragraph 8 is disclosed to the lender in connection with the borrowing arrangement referred to in paragraph 5.
For taxation purposes, a section 67A holding trust of a LRBA (including the Intermediary LRBA) is a look through entity. An act done in relation to a holding trust asset by the trustee of the holding trust is treated as if the act had been done by the trustee of the SMSF (sect 235.820 Tax Act 1997). The LRBA holding trust is not a reporting entity.
Where the borrowing is undertaken by the holding trust and maintained by the SMSF under the Intermediary LRBA, it may involve the flow of funds through the holding trust and the administrative burden of such practice.
A better and more viable course of action for SMSF trustees entering into LRBA arrangements is to maintain the current practice under which the trustee borrows directly and enters into the relevant loan arrangement with the lender. This will enhance simplicity and ease of administration.
The intermediary LRBA may however provide SMSF trustees with an option where the lender is inflexible and will only provide loans to the owner of the asset on title with no limit on the lender’s recourse in recovering the loan amount following default.
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