Limited Recourse Borrowing by an SMSF
Estate Planning Update – Autumn 2013
In the current regime of historically low contribution limits into Australian superannuation, the use of limited recourse borrowing arrangements (LRBAs) has at least provided a means for acquiring potentially appreciating assets in an SMSF even when the fund does not presently have sufficient funds to purchase them.
Increasingly LRBAs are being used where the lender is a related party, e.g. a proprietary company with retained profits or a fund member in receipt of an inheritance.
The ATO has provided clarification as to its view on what constitutes a “single acquirable asset” and in doing so has taken a view that is less restrictive than in the past, e.g. it accepts that a strata title unit can also include any car parking spaces that are tied to that unit and still be a single acquirable asset.
There is still no clarification, however, as to whether the interest rate for an LRBA can be less than market rates, e.g. when the trustee of an SMSF is borrowing from a related party such as one of the fund members. There is often an income tax detriment for such lenders to charge interest, but it remains unclear as to whether the ATO might view the interest foregone by an SMSF trustee as part of the fund member’s contributions, thus impacting on the contribution limits.
The presence of debt in an SMSF may also impact on the wording of asset specific binding death benefit nominations, e.g. where one child is earmarked to receive currently geared business premises held within a parent’s SMSF.