SMSF Loans - ATO Rulings

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Super Fund Borrowing
Memorandum

'SMSF Lending.com', as
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Property' magazine

Ever since the Superannuation Industry (Supervision) Act 1993 (SIS Act) was amended in late 2007, SMSF Lending has been arranging Super Fund loans and the accompanying legal structure.

Our finance strategist has worked closely with the NTAA (National Tax & Accountants Association) and with his knowledge and expertise in this field, has consulted with their legal department to ensure their super fund deeds comply with the varying lender requirements.

Why choose us?

SMSF Lending will guide you through the maze of super fund lending products available in the market today.

By using our services you can be sure to get the best advice for your super fund loan and our experience in this field will also assist you in ensuring the legal structure is established correctly and at minimal cost.

SMSF

lending

Super Fund Residential & Commercial Property Investment

Call Now
1300 649 407

Asset being acquired

Old law
The ATO acknowledged that pre-7 July 2010, more than one asset could be acquired under a particular arrangement and the assets acquired did not all have to be of the same form or type. Thus, a portfolio of shares in different companies or more than one title over real property could be acquired under a single limited recourse borrowing arrangement.

New law
Under the amended law, however, the original asset being acquired must be a single asset or collection of identical assets that have the same market value (eg a collection of ordinary shares in a single company).

Capital improvements and associated expenses

Old law
The ATO considered that a fund trustee could draw down under a limited recourse borrowing arrangement to make capital improvements to real property held by the custodian trust under that arrangement, maintain the asset and meet other costs of the arrangement without contravening
the pre-7 July 2010 law. However, a fund trustee could not make a drawdown to extract cash from the arrangement.

New law
The amendments clarify that money under a limited recourse borrowing arrangement applied for the acquisition of an asset can be used for expenses incurred in maintaining or repairing the asset, to ensure that its functional value is not diminished, but not to improve the asset.

Hence, a borrowing cannot, under the amended law, be used to construct a building on land or to renovate, other than to make repairs which do no more than ensure that the functional value of the property is not diminished.

Associated expenses that are considered to be intrinsically linked to the purchase of the acquirable asset can, under the amended law, also be included as part of the borrowing. The examples provided in the Amending Act (ie conveyancing fees, stamp duty, brokerage or loan establishment costs) are specifically allowed as part of the borrowing arrangement.

Limited recourse and charging the asset being acquired

Old law
The ATO accepted that pre-7 July 2010, a fund member could provide a personal guarantee to the lender in a limited recourse borrowing arrangement.

While recourse of the lender against the fund trustee in the event of a default on the borrowing had to be limited to the asset that was being acquired under the arrangement, the ATO accepted that a third party could put up their own assets as a guarantee or mortgage one of their assets (in which the fund did not have an interest) to the lender to provide additional security to the lender and, significantly, that a third party guarantor was not required to waive their usual rights of indemnity against the principal debtor (the fund trustee) in the event of a call on the guarantee.

New law
The amendments were designed to protect fund assets from claims in connection with a default on a borrowing to acquire an asset under an arrangement by limiting the rights of the lender or any other person against the fund trustee, for or in connection with or as a result (direct or indirect) of a default on the borrowing or charges related to the borrowing, to rights relating to the asset acquired.

In this way, a guarantor's rights against a fund trustee are limited as the rights of the lender are limited, so that no claim against the fund trustee should arise which could give rise to a claim for indemnity from fund assets.

Further, the asset being acquired under an arrangement cannot be subjected to a charge other than in relation to the fund trustee's borrowing or rights in relation to the asset, eg the asset cannot be used as security for another loan.