Limited recourse borrowing arrangements for self managed superannuation funds

By Luke Mountford / 07 November 2013

This alert looks at some of the key issues in paying out limited recourse borrowing arrangements (LRBA) in self managed superannuation funds (SMSF) and transferring the fund property from the custodian to the trustee of the SMSF.

Limited recourse borrowing arrangements

The basic structure of a LRBA is illustrated in the following diagram:


  1. A SMSF can borrow from a financier in accordance with the exemption in section 67A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).
  2. Section 67A of the SIS Act requires borrowed moneys to be applied for the purchase of a single acquirable asset under a bare trust arrangement.
  3. The bare trustee uses the borrowed funds and additional monies provided by the SMSF to purchase and hold legal title to the single acquirable asset.
  4. Once the loan has been repaid, the SMSF can call for the transfer of the legal title to the asset.

Perhaps it’s a result of short term loans which are now due to expire or simply that years have now passed since the introduction of LRBA in SMSFs, but there is an emerging trend in the market for the repayment of loans owed by SMSFs under LRBAs. In considering whether to pay out such a loan, it is important for the trustee of the SMSF to carefully consider the implications of doing so under the SIS Act and from a transfer duty perspective.

The in-house asset exemption

In order to be a complying superannuation fund under the SIS Act, in-house assets must comprise no more than five percent of the fund’s overall asset value.

Section 71(8) of the SIS Act provides an exemption to the in-house asset rules for an investment in a related trust in connection with a borrowing arrangement covered by section 67A(1) of the SIS Act, where the only property of the related trust is the asset acquired under the LRBA. In these circumstances, the asset will only be an in-house asset if the asset would have been an in-house asset if it were held directly by the SMSF.

The question arises as to whether this exemption continues to apply in circumstances where the loan is repaid, but the asset continues to be held by the custodian and not transferred to the trustee of the SMSF.  This question has not been answered.  To date, the courts have not been called upon to decide the issue and and the Australian Taxation Office (ATO) has not published a view.

If this exemption does not apply where there are no current borrowings, then the consequence of repaying a loan in full and not transferring the asset to the trustee of the SMSF is that the beneficial entitlement of the trustee of the SMSF under the LRBA will be an in-house asset.  This is only a problem if the value of the asset the subject of the LRBA, together with any other in-house assets in the SMSF, exceeds five percent of the total assets of the SMSF.

There are both civil and criminal penalties which apply to trustees of a SMSF who breach the in-house asset rules.

The ATO is currently working to clarify this issue and will look to issuing a public ruling at some point in the future.

A practical solution for SMSF trustees who are looking to repay borrowings is to repay the majority of the borrowings but leave a nominal amount owing so that the LRBA is maintained in accordance with 67A and the in-house asset exemption continues to apply.  Alternatively, title to the asset should be transferred from the bare trustee to the trustee of the SMSF.

Transfer duty implications

Another concern for SMSF trustees if the in-house exemption ceases to apply once the loan has been repaid, is whether or not transfer duty arises on the transfer of the asset from the custodian to the trustee of the SMSF.

We now have certainty, in Queensland at least, in relation to transfer duty on a transfer from a custodian to the trustee of a SMSF under a LRBA as a result of recent amendments to the Duties Act 2001 (Qld) (Duties Act).

Prior to the amendments to the Duties Act, custodians and trustees generally relied upon the duty exemptions in section 22(3) (agency) or section 123 (distribution of dutiable property to a beneficiary) of the Duties Act.  Some taxpayers obtained certainty by applying for a private ruling from the Commissioner of State Revenue (Qld).

The amendments provide that transfer duty is not imposed on a transfer or agreement for transfer of fund property of an “eligible superannuation entity” from, relevantly, a person as custodian for the trustee of the entity to the approved trustee.

It is important to note that the amendments to the Duties Act are taken to have commenced on 26 October 2011.  Accordingly, if transfer duty has been paid, the trustee or custodian could be eligible for a refund of duty if the requirements of the amended sections are satisfied.

The position in Western Australia in similar to the position in Queensland. Section 126 of the Duties Act 2008 (WA) (WA Duties Act) provides that nominal duty is payable on the transfer of dutiable property from the custodian to the trustee of the SMSF provided that there is no change in the beneficial ownership of the dutiable property. While this is not a full transfer duty concession, Division 3 of Schedule 2 of the WA Duties Act confirms that the nominal duty payable is $20.00. An application for relief must be made in the approved form.

Prior to the transfer of fund property from the custodian to the SMSF, the trustee of the SMSF should obtain advice or satisfy itself of the duty implications in the relevant jurisdiction at that time.

More information

To discuss this Alert in more detail, and/or for assistance to prepare the documentation to set up a bare trust arrangement, please get in touch. 

Luke Mountford
Luke is a Partner in our Private Enterprise practice and he works predominantly with HG Private clients advising on their corporate and commercial legal matters.

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