Can I refinance my SMSF limited recourse borrowing?


Super law now allows for refinancing, but the lenders don't appeared to have moved with this law change?

With the growth in the use in SMSF limited recourse borrowing arrangements, we are seeing far more competitive loan products in the marketplace for fund trustees.

Whilst the changes to section 67A of the SIS Act allow for refinancing of loans, it appears that many of the lenders policies haven’t changed to allow for refinancing to occur.

It is my understanding that of the major institutions, only Westpac allow for refinancing of SMSF loans.  I believe there are some private funder arrangements for SMSF loans that will also allow for refinance (although most of these products are at a higher interest rate than the majors).

In addition, I note whilst there is some refinancing available, these lenders are only interested in doing bank-to-bank arrangements.  That is, a member-financed (related party/BYO lender) arrangement at this stage don’t appear to be of interest to banks to take over.

Is this the case? Let us know which banks you know of that are providing refinance?   Do you know of lenders allowing for refinancing of member-financed loans?  Please comment below to share any knowledge and experiences that you have had with refinancing a SMSF limited recourse borrowing arrangement.

Watch our latest video on borrowing in super


Borrowing in super has become a very popular strategy with self-managed super funds since its introduction back in September 2007.  I see more and more SMSFs using borrowing, but you need to be aware of some of the traps in using this strategy.

When first introduced, superannuation borrowing was done using what was then called an “instalment warrant” which was somewhat confusing and technical.  The super laws changed again from 7 July 2010 and now borrowing inside a super fund is referred to as a “limited recourse borrowing arrangement”.

Even though the laws for borrowing in super changed again in 2010, there were only a few changes that were really significant from the original legislation.

What assets can I buy when borrowing using super?

The answer is simple. Any asset that a super fund can buy for cash it can borrow to buy.

There are four basic conditions when borrowing using super:

  1. The borrowing must be used for the acquisition of an asset;
  2. The asset must be held on Trust;
  3. The borrowings must be of a limited recourse nature and
  4. When the debt is fully repaid the Trustee of the super fund borrower has the automatic right to have the asset transferred.

A limited recourse loan is when if the borrower (the super fund) does not repay its loan, the only asset the lender can sell to get its money back is the asset that has been bought by the super fund borrower. The lender has no claim over the other assets of the super fund borrower.

How the borrowing laws work

When your super fund borrows it must buy “a single acquirable asset”, that is, it must buy one asset only.  However, a collection of identical assets qualifies as “a single acquirable asset”.  For example 1,000 Telstra shares is “a single acquirable asset”; a collection of several different shares is not.

The asset purchased by the super fund using the borrowings must be held on trust as shown in the diagram below:

This bare trust does nothing except hold the asset on trust for the borrowing super fund.  All activities relating to the acquired asset operate from the self-managed super fund.  The bare trust does nothing other than hold the asset on trust.  It does not have a Tax File Number, or an ABN.  All income is deposited into the super fund bank account and all expenses including loan repayments are paid from there to.

Any lending from a party apart from a traditional lender, such as a bank must be conducted on commercial terms (arms-length).

As mentioned earlier, a “limited recourse borrowing arrangement” bare trust structure now only allows for one “single acquirable asset”.  When the asset is repaid, title of the asset passes to the borrowing super fund.  There is no capital gains tax or GST implications for the transfer of this asset to the super fund.  With stamp duty however, you need to be careful as different States have different laws in respect of stamp duty.  It is important that you get the right advice before you proceed with any borrowing strategy.

The lender can only use the “single acquirable asset” as security.  If the borrowing fund does not pay its loan, that is it defaults, then only the single asset can be used to repay the lender.  This is why you will see the banks obtaining a personal guarantee to protect them from any shortfall in the value of the asset in the event of default.

The super fund can repay capital off the loan using:

  • the income from the acquired asset;
  • contributions made by the members of the fund; and
  • other income earned by the fund’s other assets.

A significant change from 7 July 2010 is the ability for a super fund to now be able to refinance an existing debt.

A super fund can borrow from a traditional Bank (there are many financial institutions offering SMSF loan products).  It can also borrow from:

  • the fund members,
  • a company
  • a (family or discretionary) trust
  • a relative or friend

Any lending from a party apart from a traditional Bank must be conducted on an arms-length basis.

A key attraction of limited recourse borrowing arrangements is the ability to buy property.  Many business owners use this strategy to acquire commercial property in which to operate their business from.

There are many other rules that affect borrowing in super.  You can for example borrow to develop property, however the rules around doing this are quite detailed and complex (See article “property development in a SMSF” for further details).

It is important that you seek advice before undertaking any form of limited recourse borrowing to acquire an asset.

Watch more videos on our YouTube Channel, SMSFAcademyTV.

Are limited recourse borrowings beyond repair?


Changes that took effect on 7 July 2010 for limited recourse borrowing arrangements don’t seem to have dampened the enthusiasm for people being attracted to the use of this strategy to acquire either residential or commercial property within a SMSF.

These changes have however introduced a more restrictive environment in holding property, in particular for those who wish to acquire with a view to making improvements to increase the future value of the property.  There are some concerns within the industry that a lack of understanding of these super laws may result in breaches of the requirements contained in section 67A & 67B of the SIS Act (click to read SPAA’s media release).

A key change to the borrowing rules is the inability to renovate or make improvements to an asset as this would fundamentally change the nature of the asset used as security by the lender.  This potentially increases the risk to the fund. However, 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.

Drawing down on an existing borrowing

There now appears to be some inconsistencies between the ability to undertake repairs (initial or ongoing) of an asset purchased using a limited recourse borrowing arrangement and SMSFR 2009/2, which looks at the meaning of borrow money’ or ‘maintain an existing borrowing of money’ for the purposes of section 67 of the SIS Act.   This ruling treats each draw down as a separate and new borrowing.  This is confirmed in paragraph 93 of this ruling where:

93. The Commissioner also considers that each drawdown of funds from a loan facility or similar arrangement constitutes a separate borrowing, even if the facility or arrangement makes provision for redraws arising from earlier repayments.

Whilst the ATO agrees that it follows that each borrowing under a LRBA must meet the requirements of paragraphs 67A(1) (a) to (f), their view is to consider the arrangement as a whole, rather than each separate borrowing under that one arrangement.

For the purposes of satisfying section 67A(1)(a), it is sufficient if the borrowed money is used to repair the acquirable asset, whether the money is borrowed initially or later into the arrangement.  By taking the ‘whole view’ approach to the acquirable asset, the ATO does not regard a repair, or any materials or services used as an incident of that repair, to be an acquirable asset in their own right.

Initial Repairs

When looking at the acquisition of an acquirable asset such as property, the purchase price of an asset may be dictated by the current state of the property and its level of functionality.

The topic of initial repairs for tax purposes is contained within Tax Ruling TR97/23.  It outlines many of the issues in differentiating between capital and revenue expense for tax purposes.  But when considering the requirements of superannuation law (SIS Act), the timing of the deterioration is somewhat irrelevant in determining whether a borrowing can occur to rectify that deterioration (in accordance with s.67A).

It appears the issue is whether the activity is a repair according to ordinary concepts as compared to an improvement.  The discussion in TR97/23 is relevant, in particular paragraphs 83 to 87 when considering the ordinary meaning of ‘repair’.

The debate of what is repair and improvement has been around for a very long time with tax professionals.  It has been a “grey area” for a long time, and the introduction of this concept into limited recourse borrowing certainly adds a further layer of complexity.

To appreciate the level of interest and the ongoing questions and issues surrounding limited recourse borrowing arrangements, the last NTLG Super Technical Sub-Committee meeting conducted by the ATO recommended a workshop with member representatives of the professional bodies to work through these ever-increasing issues.

Therefore, expect to see a lot more information coming from ATO in 2011.

Click here to find out how to use borrowings within super for property development.

Would you be interested in attending an intensive day on SMSF limited recourse borrowing arrangements?  Click here to vote in our poll.

What is a ‘single acquirable asset’ for limited recourse borrowing arrangements?


One of the key changes that took effect on 7 July 2010 for limited recourse borrowing arrangements (section 67A  of  the SIS Act), was the introduction of the terminology of a ‘single acquirable asset’.

This change has had a profound impact on many of the strategies that were available under the ‘old’ section 67(4A) where the holding (bare) trust was able to:

  • purchase and hold more than one asset, plus
  • have greater freedom around what constituted a replacement asset, which included buy and selling shares, making capital improvements to property, subdivision, etc.

You can see from the diagram below, how the ‘old’ law applied in respect to instalment warrants (now limited recourse borrowing arrangements):

The next diagram reflects the change to the term of ‘single acquirable asset’ where the bare (or holding) trust can only acquire a single asset or collection of identical assets – i.e. #1,000 NAB shares.  This has been effective since 7 July 2010.

This change has introduced a range of issues for property acquisition using borrowings inside an SMSF, in particular in situations of real property that is held over one or more titles.  For example, a strata title unit or office might also have a car park, however it is on separate title.  Similarly, a commercial premises that is effectively one asset might be comprised of several titles for historical or other reasons.  Commonly the property will be sold under one contract of sale between the vendor and purchaser as part of the same dealing.

There is concern raised from within the SMSF industry to the Australian Taxation Office (“ATO”) that if a narrow interpretation of ‘asset’ is adopted, this will require a two separate limited recourse borrowing arrangements, being:

  • the trustee must take out a separate loan for each title to the property; and
  • A need to have a separate declaration of trust prepared for each title (separate bare trusts).

A recent NTLG Superannuation Technical sub-committee meeting (September 2010) raised some of these concerns with the ATO.  It appears that their response is to endeavour to take a practical approach to the interpretation of ‘single acquirable asset’  in section 67A(1)(a).  In cases where assets are for practical purposes indissociable (inseparable), or where there is an incidental ancillary asset of a very small value, the ATO will not treat this to be a breach of the definitional requirement of a ‘single acquirable asset’ under 67A(1)(a).

What about strata-title?

Due to the varying factors of strata-title arrangements, the ATO will not form a ‘macro’ view on this matter, rather they only consider the facts of each particular case in making a decision.  In cases where section 67A(1)(a) is not satisfied there would need to be separate limited recourse borrowing arrangements in respect of each acquirable asset.

Expect to see more to follow on this topic as the Tax Office work through many of the questions around these limited recourse borrowing arrangements.

See further articles on limited recourse borrowing arrangements:

Click here to watch our previous Webinar on SMSF borrowing strategies.

Buying “off-the-plan” with limited recourse borrowing arrangements


Recent media suggests rapidly growing interest in the use of limited recourse borrowing arrangements to acquire property using a Self Managed Super Fund.

One of the more common ways people are acquiring property is through “off-the-plan” (OTP) developments, whereby the SMSF signs a contract for the vendor to deliver at settlement a completed apartment.

How an OTP typically works

Under an OTP purchase, typically the vendor enters a contract with a builder to build the apartment and the purchaser merely enters the purchase contract for the completed apartment and land.  At the time of signing, there may still be the need to sub-divide the title and build the apartment.  Settlement is often delayed until a certificate of occupancy is issued for the apartment once it is completed and the building surveyor has signed-off that it complies with relevant planning, etc.

The ‘industry view’ is that such an arrangement as above for OTP is a purchase of a ‘single acquirable asset’ and not an improvement, in so far that the SMSF obtains a completed apartment pursuant to the contract at settlement. However, as always, it is the view of the Regulator that we most eagerly await for…

The ATO’s views

The recent minutes from the NTLG Superannuation Technical Sub-Committee, suggest that the Tax Office have not yet finalised their view on this matter (they are seeking further details).

However, what is interesting to note, is that the ATO will be looking at the timing of the borrowing being commenced, that is, has the borrowing started after the apartment is completed and strata-titled?

As a result, an such arrangement would need to keep in mind the following requirements:

  • The acquirable asset must be placed in the holding (bare) trust when the borrowing is commenced and held in trust while the borrowing is maintained.
  • If the acquirable asset is replaced by another asset in circumstances not listed in section 67B, or in a regulation made for the purposes of subsection 67B(8), then the arrangement must be terminated at or before that time or a contravention of subsection 67(1) results.

It appears that the ATO’s view is that if the borrowing is made to fund the deposit and to acquire what at that stage is merely a contractual right to acquire title in future property, then there is a risk that the replacement of that ‘right’ by the actual asset would be a breach of the limited recourse borrowing arrangement provisions.

It is imperative that for SMSF trustees (and their advisers) looking an OTP purchases closely consider (and obtain advice) the contractual arrangements of the acquisition when undertaking a limited recourse borrowing arrangement.

Note: A further article will follow next week about the latest on multiple titles with limited recourse borrowing arrangements, including apartments with car parks, office buildings and farmland.

(C) The SMSF Academy 2012
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