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ATO issues confirmation that LRBAs do not contravene super law

The ATO recently released a determination which finally confirms that common structures used by SMSFs to borrow money to purchase high value assets such as real property does not amount to the holding of an in-house asset by the SMSF trustee and therefore does not contravene superannuation law.

Ari Armstrong, Maddocks Lawyers


It has been standard industry practice for some time for self-managed superannuation funds (SMSFs) to set up custody trusts which hold real property for the benefit of the SMSF. The acquisition of the real property is achieved by the custodian entering into a limited recourse borrowing arrangement (LRBA) with either a related party or a third party lender such as a bank. These arrangement are commonly, but not solely, used for real property acquisitions and are occasionally used for the purchase of large equity holdings.

As outlined in an earlier article here, such borrowings are permitted, provided they are maintained on arm's length terms. Failure to ensure arm's length terms can result in the fund's income from the arrangement being taxed at the highest marginal tax rate.

On 19 May 2020, the ATO registered the Superannuation Industry (Supervision) In-house Asset Determination - Intermediary Limited Recourse Borrowing Arrangement Determination 2020 (Determination). The Determination confirms that the Tax Commissioner will accept that an asset under arrangements outlined above will not be considered to be a an in-house asset and therefore does not breach the in-house asset rules.

The guidelines apply to SMSF trustees who have entered into these LRBAs in order to meet the requirements of superannuation law.

The guidelines apply to SMSF trustees who have entered into these LRBAs in order to meet the requirements of superannuation law.

In-house asset rules for SMSFs

Borrowing or gearing your super into property involves very strict borrowing conditions - known as 'limited recourse borrowing arrangements'. A trustee of an SMSF can only purchase a single asset with a limited recourse borrowing arrangement

Section 82 of the Superannuation Industry (Supervision) Act 1993 (SISA) limits the market value of in-house assets (i.e. assets which are owned by, on an investment in, a related party) that may be held by an SMSF to 5% of the market value of the total assets held by the SMSF. Given the fluctuations of the market values, this is tested at the end of each financial year. Obviously, an asset such as real property will most likely cause this rule to be breached if it is classified as an in-house asset.

What is the Determination about?

The Determination confirms the long-held belief that if a custody trust holds an authorised investment for the benefit of the trustee of the SMSF, it will not be considered an in house asset of the SMSF. Specifically, it states:

"For the purposes of paragraph 71(1)(f) of the SISA, if at a time:

  1. an asset (the investment asset) of a fund is an investment in a related trust of the fund; and
  2. the related trust is one described in paragraph 67A(1)(b) in connection with the Intermediary LRBA under which the trustee of the fund is maintaining a borrowing that is covered by subsection 67A(1); and
  3. the only property of the related trust is the acquirable asset mentioned in paragraph 67A(1)(b);
the investment asset is not an in-house asset of the fund at the time unless the acquirable asset mentioned in paragraph 67A(1)(b) would be an in-house asset of the fund if it were an asset of the fund at the time."

The custodian of the custody trust set up to purchase the property usually needs to be a corporate entity with members of the SMSF being its only shareholders/directors - these are not legal requirements, but are usually imposed by the lender). The authorised investment must be the only asset the custody trust holds, and is permitted to hold. The mortgage loan must not limit the lenders right of recourse as against the authorised investment in the event of default and the rights and obligations of the custodian are limited to the authorised investment.

What is different about the Determination and the existing section 71(8) of the SIS Act?

The SIS Act contains a similar provision in section 71(8) which recognises that LRBA arrangements entered into by SMSF trustees are not regarded as in-house assets. However, section 71(8) only applies where the trustee of the fund borrows directly. This is not the case for LRBA borrowings - where it is the trustee of the custody trust which is the borrower and the trustee of the fund maintains that borrowing. Therefore, the Determination seeks to resolve this mischief by making reference to an 'Intermediary LRBA' - the definition of which includes a borrowing which requires:

'the trustee of the fund to maintain all borrowing obligations entered into by the Holding Trustee in respect of the [LRBA]'

What does the Determination mean for trustees in practically

Assuming all legislative requirements of the LRBA (outlined above) are met, the Determination merely confirms standard industry practice is correct and no further action is required. The Cleardocs SMSF borrowing products are compliant with superannuation law and may be purchased here: and here

Current minimum interest rates for SMSF LRBAs

For the 2019/2020 financial year the minimum interest rate is 5.94% where the authorised investment is real property, and 7.94% where the authorised investment is listed shares or units. 1

The ATO uses the rates published by the Reserve Bank of Australia (RBA) to set the minimum interest rate. Given the recent economic downturn associated with the COVID-19 pandemic, the RBA has published a rate of 5.1% for the 2020/2021 financial year, which is a significant reduction from the previous year. 2

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics, such as:

Order related document packages


[2] refer to table F5


Lawyer in Profile

Leigh Baring
Leigh Baring
+61 3 9258 3673

Qualifications: LLB (Hons), BEc (Hons), Monash University

Leigh is a Partner in Maddocks Tax and Structuring team. Leigh has extensive experience in advising Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.

Leigh regularly provides advice on:

  • structuring of businesses and transactions,
  • mergers and acquisitions,
  • corporate reorganisations and distributions,
  • sale of businesses,
  • demergers,
  • capital raisings,
  • joint ventures and property developments,
  • international tax (both inbound and outbound), and
  • succession planning and liquidations.

His advice covers both direct and indirect tax considerations.

Throughout his career, Leigh has been at the forefront in developing tax-effective corporate, trust and superannuation structures.

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