The ATO has officially expanded the strategies available to an SMSF to use a limited recourse borrowing arrangement (LRBA) can be used to acquire assets for the fund.
Instrument SPR 2020/1 has enabled SMSFs to use intermediary LRBAs as a legitimate structure to employ gearing to purchase assets.
An intermediary LRBA differs slightly from a conventional loan of this type. A conventional LRBA is one where the SMSF is the principal borrower of the funds required to purchase the asset in question. A holding trust is also established to house the asset for the time it takes for the loan to be paid off.
An intermediary LRBA also requires the establishment of a holding trust to house the asset for the duration of the loan, but the holding trust is the principal borrower instead of the SMSF and gives mortgage of the asset, in most cases a property, to the lender.
This type of gearing facility is regarded as more attractive than the standard LRBA because the lender is likely to grant the borrower more favourable terms, such as a lower interest rate, as the limited recourse requirement is not as strict due to the fact the SMSF is not taking out the loan.
The ATO’s action was necessary as intermediary LRBAs, before the release of SPR 2020/1, were considered a breach of the in-house asset rules.
While the concession for intermediary LRBAs has been granted, Townsends Business & Corporate Lawyers superannuation online services division managing solicitor Jeff Song noted there is still some ambiguity and specific requirements with SPR 2020/1 of which SMSF trustees need to be aware.
“The wording of the ATO determination may be somewhat ambiguous as to whether it necessarily requires each and every member of the fund to be a shareholder [of the corporate trustee of the holding trust],” Song said.
As such, he recommends making every fund member a shareholder to ensure compliance.
“[Also] the requirements in relation to documenting the holding trust are more prescriptive. In order to ensure that the arrangement can rely on the ATO’s determination as an exception to the in-house asset rule, the holding trust deed must have been carefully drafted and executed as a legally binding deed encompassing all the prescribed conditions in the determination,” he said.
The relaxing of the LRBA rules had been anticipated earlier in the year.