ATO ID 2010/170: Self managed superannuation fund: limited recourse borrowing arrangement - third party guarantee
Date of decision: 30 June 2010
Year of income: Year ended 30 June 2009
Business line: Superannuation

Issue
Can a borrowing by the self managed superannuation fund (SMSF) trustee satisfy the requirements of former subsection 67(4A) of the Superannuation Industry (Supervision) Act 1993 (SISA) where a related party of the SMSF has given the lender a personal guarantee as part of the arrangement?

Decision
Yes, a borrowing arrangement that includes a guarantee to the lender by a related party of the SMSF can satisfy the requirements of former subsection 67(4A) of the SISA.

Facts
An SMSF trustee has borrowed money from a financial institution in order to acquire an asset under a limited recourse borrowing arrangement. The arrangement was entered into on 18 June 2009. A member of the SMSF has given the bank a personal guarantee in respect of the borrowing that may be called upon by the bank in the event of a default on the borrowing. In the event of a default on the borrowing the rights of the lender against the SMSF trustee are limited to rights relating to the asset being acquired. In addition, the lender can call on the guarantee of the member. The arrangement otherwise satisfies the requirements of former paragraphs 67(4A)(a) to (e) of the SISA.

Reasons for decision
Summary: Regulated superannuation funds are generally prohibited from borrowing money or maintaining a borrowing of money, by subsection 67(1) of the SISA, unless the borrowing satisfies one of the exceptions provided for by section 67 of the SISA. One such exception is provided for by former subsection 67(4A) of the SISA (applying to limited recourse borrowing arrangements entered into before 7 July 2010). In order to satisfy former subsection 67(4A) of the SISA, the limited recourse borrowing arrangement must meet the following requirements set out in former paragraphs 67(4A)(a) to (e) of the SISA: Unless varied by the express terms of the guarantee, then in the event of a call on the guarantee resulting in a payment by the guarantor to the lender, a guarantor will generally have rights at common law and in equity against the principal debtor (the SMSF trustee) to recover amounts paid in satisfaction of the obligations under the guarantee. This may include interest and costs and in some circumstances, damages. The recourse of the guarantor is therefore not necessarily restricted to the asset which is the subject of the arrangement. The rights of the guarantor are not rights of the lender against the SMSF trustee for the purposes of former paragraphs 67(4A)(d) and (e) of the SISA. The rights of the guarantor do not cause the arrangement to fail to meet the requirements of former subsection 67(4A). | Detailed Reasoning - Guarantor's rights now must be limited: However, limited recourse borrowing arrangements entered into by SMSF trustees on or after 7 July 2010 must meet the requirements of section 67A of the SISA. Arrangements involving guarantees will not meet these requirements unless the rights of the guarantor against the SMSF trustee are limited to rights relating to the asset which is the subject of the arrangement. One way in which the rights of a guarantor may be excluded or limited is by the express terms of the guarantee.

Legislative references: Superannuation Industry (Supervision) Act 1993 subsection 67(1) former subsection 67(4A) section 67A
Subject references: Self managed superannuation funds SMSF borrowings