The SMSF Association has alerted its members the ATO has updated its guidance on limited recourse borrowing arrangements (LRBA) with respect to the operation and inclusion of offset accounts with these gearing instruments offered by Authorised Deposit-taking institutions (ADI).
The regulator’s position on the matter was included in the most recent version of its online guidance under QC 109937 and confirmed genuine offset accounts ADIs provided under an LRBA are not considered to constitute a breach of the Superannuation Industry (Supervision) (SIS) Act.
“A deposit facility offered by an ADI that is an offset account notionally reduces the loan balance of a mortgage, resulting in a reduction of interest calculated against the loan. Genuine offset accounts offered by an ADI are allowed as it’s not considered a borrowing or charge over the fund’s assets,” the ATO guidance stated.
However, its position toward offset accounts included in borrowing arrangements facilitated by non-ADI institutions was not as definitive.
Here the ATO said, “Offset accounts offered by non-ADI lenders are not considered bank deposits. Therefore, due diligence should be taken when considering this type of arrangement.”
In response to the regulator’s varied approach to offset accounts offered by different types of lenders the SMSF Association recommended its members take a cautious approach when putting an LRBA in place through a non-ADI.
“Until such time as we have more clarity from the ATO, we encourage our members to seek evidence from non-ADI lenders, such as an ATO Product Ruling or legal opinion, that demonstrates the offset account complies with the SIS Act,” the industry body suggested.
The ATO guidance under QC 109937 also confirmed where practitioners should be wary in regards to drawdowns from an LRBA. These are monies released from an LRBA to the SMSF trustee that do not constitute the full amount of the loan. The circumstances where drawdowns might be allowed is where additional borrowings are applied in maintaining or repairing the asset held under the LRBA or are included in the original terms of the gearing mechanism.
The regulator warned drawdowns may actually result in a new borrowing arrangement.
“The terms of an LRBA may allow multiple drawdowns. Each drawdown must be reviewed by the trustee to determine whether the borrowing meets the requirements of super law applying to the arrangement,” the ATO said.
“A contravention occurs if a drawdown doesn’t meet the requirements of super law,” it stipulated.
