Further details required on LRBA rules

The SMSF Association has welcomed initial guidance from the ATO regarding the operation of the changed limited recourse borrowing arrangement (LRBA) rules, but has called for more comprehensive information to be released and existing directions to be updated.

Association chief executive Peter Burgess said the release today of information on the regulator’s website clarifies transitional arrangements in the lead-up to 10 August, after which using an LRBA to purchase residential property in an SMSF will be banned.

“We acknowledge the ATO has moved quickly to provide guidance, especially on what it means to have ‘entered into an LRBA’ before 10 August for the purposes of the transitional arrangements,” Burgess said.

“The new guidance confirms that transitional relief turns on the exchange of a binding contract before 10 August. However, this certainty may come at a cost for some trustees who have already undertaken substantial steps towards a transaction and incurred significant costs, but are not yet in a position to exchange contracts.

“While a binding contract test provides a clear line, it risks leaving trustees who have acted in good faith without the protection they expected.

“The guidance is also helpful in confirming that genuine off-the-plan contracts exchanged before 10 August will be protected, even where finance is approved, settlement occurs or the LRBA is entered into after commencement.”

He noted the guidance states that sufficient variations to a contract after exchange may be significant enough for it to be viewed as a new arrangement, but did not provide more detail on how that would be determined.

“Given that commercial variations commonly arise between contract exchange and settlement, greater certainty is needed on how the commissioner will approach these situations,” he added, noting the changes highlight the outdated nature of previous LRBA guidance provided in Self Managed Superannuation Fund Ruling (SMSFR) 2009/1.

“These reforms have also highlighted how heavily the industry now relies on SMSFR 2009/1, which has not kept pace with modern property and business arrangements.

“We look forward to the ATO’s review of SMSFR 2009/1 and hope it also provides greater certainty on how the business real property rules will apply in practice over the life of an LRBA, particularly as commercial circumstances and property uses evolve over time.”