Prevailing market conditions can pose problems in acquiring shares using LRBAs


Whilst most of the attention with limited recourse borrowing arrangements (LRBAs) has centred around property transactions, there has been a need to clarify a range of issues on other acquirable assets, in particular assets allowable as a collection of identical assets under the definition of a single acquirable asset (SAA).

It’s not uncommon when placing an order of shares that there may be insufficient volume at a particular price to acquire shares or units.  This is particularly common where the shares are to be acquired at the prevailing market price.  This results in the single order being ‘filled’ over multiple share prices or even different dates.   This however poses a problem for those undertaking any share acquisitions using a limited recourse borrowing arrangement, because of the strict interpretation of a collection of assets” within the single acquirable asset as defined within s67A(3) of the SIS Act.

The question was asked of the ATO recently (via National Tax Liaison Group (NTLG) Superannuation Technical sub-group, September 2012) as to whether a single order of shares filled over multiple prices or dates will still meet the definition of a single acquirable asset.

To understand the issue, let’s consider the following example:

ABC Super Fund enters in a LRBA to acquire #42,500 shares in NewCo Limited at the prevailing market price. This single order is undertaken by the trustees through their CommSec account.  Due to the share volumes available at the time of the order and movement in the prevailing market price, the purchase of the shares were completed in three tranches:

  • 01/10/2012 – #30,000 @ $4.70
  • 01/10/2012 – #10,000 @ $4.72
  • 02/10/2012 – #2,500 @ $4.67

Have we got a problem?

It is important to note that the policy intent around the changes introduced on 7 July 2010 were to prevent borrowing arrangements over multiple assets in which may permit the lender to choose which assets are sold in the event of default.   Whilst a strict interpretation of s67A would mean this transaction would fail as a single acquirable asset, the ATO has stated that in circumstances such as these, they are prepared to ignore short delays in fulfilling a single on-market order to purchase shares or a single on-market order at the prevailing market price which might result in some shares being acquired at different prices.

For the trustees of the ABC Super Fund, the ATO would allow these this single order to be filled over multiple transactions, given the short timeframe to fulfil the order (based on the prevailing market conditions).

Whilst providing a logical outcome for fund trustees, the Regulator has also made it abundantly clear that it will not allow trustees to embark on a course of action to accumulate or sell down shares as an acquisition of a ‘single acquirable asset’.

Do you see much activity with LRBAs to acquire assets other the property?

WEBINAR – SMSF limited recourse borrowing arrangements


The topic of borrowing in super continues to gain momentum with a growing number of SMSFs looking to establish limited recourse borrowing arrangements (LRBAs) to acquire property.

The next SMSF Academy webinar will discuss the latest issues impacting LRBAs including:

  • Understanding the Commissioner’s views in the final ruling, SMSFR 2012/1: application of key concepts with LRBAs
  • Update on the proposed licensing requirements
  • Considerations of insurance with LRBAs
  • Latest ATO issues with related party loans, interest rates, multiple loans, off-the-plan acquisitions and much more

Find out more and register here


Zero interest in SMSF borrowing?

Whilst the interest in limited recourse borrowing within self-managed super funds appears to be rising, the opposite has been posed to the  Australian Taxation Office in respect to the level of interest than may be applied to a related party loan.

The June 2012 NTLG minutes posed the question as to whether a zero percent interest rate could be applied to related party loan in accordance with the provisions of section 67A of the SIS Act, which outlines the requirements of a limited recourse borrowing arrangement.  This question follows the ATO’s interpretative decision ATOID 2010/162 which confirms that a fund is dealing at “arm’s length” where the terms are more favourable to the SMSF.  What wasn’t outlined within the interpretative decision was whether the differential in ‘market rates’ versus a lower interest rate could constitute a contribution.

In an interesting outcome from this meeting, it is the views expressed by the ATO confirm that a zero percent interest rate can be established with a related party LRBA loan without the discrepancy between what is ‘commercial’ and the lower rate offered to the fund being classified as a contribution.  Consistent with the views express within SMSFR 2009/2, regarding the meaning of ‘borrow money’ or ‘maintaining a borrowing of money’, the most important element is that a genuine loan is in place (where it can be shown that there is an intention that the loan will subsequently be repaid to the lender).  Whilst a borrowing arrangement will usually involve an interest charge, the fact that no interest (or a lower interest rate) is charged will not, of itself, preclude the loan arrangement from being a borrowing.

It is important to remember that nothing within the borrowing exception of s67A of the SIS Act prescribes that a rate of interest must be applied in respect to the fund entering into a borrowing arrangement.

The release of this information by the ATO has already sparked the interest of many as a way to further improve ‘inflows’ into superannuation for many members who have been ‘capped out’.

What do you think about the ATO’s views expressed about SMSFs being able to provide 0% interest rate loans?

Final ruling provides good news for SMSF property investing using borrowing

If the industry was pleased about the draft ruling on limited recourse borrowing arrangements (LRBA), the final ruling, SMSFR 2012/1 has done nothing to wipe the smiles off trustee & industry faces.  The ATO has taken a practical approach in this ruling to key concepts including:

  • What is an ‘acquirable asset’ and a ‘single acquirable asset’
  • ‘maintaining’ or ‘repairing’ the acquirable asset as distinguished for ‘improving it’; and
  • When a single acquirable asset is changed to such an extent that it is a different (replacement) asset

Much of the industry feedback for the final ruling was to add further clarity and practicality to assist trustees and professionals alike to understand these key concepts.  Broadly, I think this ruling has achieved a more than satisfactory outcome for the specific issues.  There does however remain a range of outstanding issues that further clarification, including in-house assets, the concept of the holding trust vs. bare trust amongst others.

I have provided below a summary of my views from the final ruling, SMSFR 2012/1: Limited Recourse Borrowing Arrangements – application of key concepts:

Single Acquirable Asset

The final ruling has expanded on its initial views regarding the need to consider both the legal form and substance of the acquired asset, having regard to both the proprietary rights (ownership) and the object of those rights.  It explains that it may be possible to for an asset to meet the single acquirable asset definition, notwithstanding that the object of property comprises of separate bundles of proprietary rights (e.g. two or more blocks of land).

The final ruling further outlines factors relevant in determining if it is reasonable to conclude that what is being acquired is a single object of property.  These include:

  • the existence of a unifying physical object, such as a permanent fixture attached to land, which is significant in value relative to the overall asset value; or
  • whether a State or Territory law requires the two assets to be dealt together.

Where the physical object situated across two or more titles:

  • is not significant in value relative to the value of the land; or
  • is temporary in nature or otherwise able to be relocated or removed relatively easily; or
  • a business is being conducted on two or more titles; or
  • the assets are being acquired under a single contract because, for example, the vendors wish to ‘package’ the assets

will mean that these assets will remain as being distinctly identifiable and not be identified as a single object of property.

Repairs, maintaining and improvements

The most pleasing aspect of reading the final ruling was the removal of any references to TR97/23, which from a tax perspective deals with repairs vs. improvements. Importantly, in distinguishing between repairs, maintaining and improving, the Commissioner applies their ordinary meaning having regard to the context in which they appear within s67A & s67B of the SIS Act.

The ruling provides a variety of practical illustrations that demonstrate what is a repair or maintenance (where borrowings can be applied) versus what would amount to an improvement (where borrowings can not apply, however the fund or member’s own resources can be applied for any improvement). In particular, the Commissioner has clearly indicated that restoration or replacement using modern materials will not amount to an improvement. The lines may be blurred somewhat if superior materials or appliances are used, how it would be a question of degree as to whether the changes significantly improve the state or function of the asset as a whole.

This distinction of repairs, maintaining and improving is critical because we must remember that borrowed funds can only be used for prescribed purposes – being the acquisition of a single acquirable asset, including expenses incurred in connection with the borrowing or acquisition, or in maintaining or repairing the acquirable asset. Where improvements are made with borrowed funds, this is a breach of not only the s67A exception, but then any maintenance of a borrowing beyond this becomes a breach of s67(1) (general borrowing prohibition).

In general terms, any improvements made to property where the single acquirable asset was for example the residential house and land is allowed whilst carrying a limited recourse loan, but only to the extent that it doesn’t become a different asset. For example, the addition of a pool, garage, shed, granny flat, additional bedroom, or second story are all allowable improvements without changing the character of the asset where it becomes a different asset (breaching the replacement asset rules in s67B).

Different (replacement) asset

It is important that the single acquirable asset is not replaced in its entirety with a different asset (unless covered under s67B).  When considering the object and proprietary rights of the asset, any alterations or additions that fundamentally changes the character of that asset will result in a different asset being held on trust under the LRBA.

The ruling provides a range of examples as to when an asset become a different asset including through subdivision, a residential house built on land, and change of zoning (residential to commercial).  There are however various examples that demonstrates that where such improvements don’t create a different asset, including:

  • one bedroom of house converted to home office
  • house burnt down in a fire and rebuilt (regardless of size) using insurance proceeds and SMSF funds
  • compulsory acquisition by government on part of property; and
  • granny flat added to back of property

Property development

When it comes to the use of a LRBA for the development of property, the ruling provides clarity around the importance of the terms of the contract of purchase as to what will constitute the single acquirable asset.   For an off-the-plan purchase (as was stated in the draft ruling), if a contract was entered into and under the contract a deposit was payable with the balance payable on settlement after being built and strata-titled, this is allowable under a LRBA (as the strata-titled unit is the single acquirable asset).  It is noted that a separate car park or furniture package will not meet likely be packaged into the single acquirable asset and require a separate (or multiple) LRBA.

The Commissioner has expanded his views further in the final ruling that a similar outcome occurs if the contract entered into is for the purchase of a single title vacant block of land, along with construction of a house on the land before settlement occurs.  Where the deposit is paid upon entering the contract and the balance payable upon settlement is applied for the acquisition, it may be funded by a single LRBA as the single acquirable asset is the land with a completed house on it.  Examples 9 and 10 within the ruling outline the important differences how house and land purchases need to be structured to meet the single acquirable asset definition.


In my view, the end result is a positive one for property investors within self managed super funds.  The scope available for improvements certainly makes this strategy appealing as well.  Fundamentally though, you need to ensure that the investment will stack up being held inside superannuation…

It will be interesting to watch the changing landscape of borrowing in super as the impact of this final ruling and the proposed licensing obligations on these arrangements unfold over the coming months…


Listen to my latest podcast on SMSF borrowing

I have uploaded today a new podcast interview on the hot topic of Limited Recourse Borrowing Arrangements within Self-Managed Super Funds.

This 20 minute podcast interview is with Kris Kitto, SMSF Specialist Advisor and Manager at leading SMSF Administration, SuperFund Partners. Kris is also the author of

In this podcast we discuss some of the current strategies being used with SMSF borrowings, the types of investors undertaking this strategy, along with the ATO current Tax Office issues around the definition of a single acquirable asset and what constitutes a replacement asset in accordance with section 67B of the SIS Act.

You can download and listen to The SMSF Academy’s latest podcast on SMSF Limited Recourse Borrowing. 

(C) The SMSF Academy 2012
%d bloggers like this: