Taxpayer Alert TA 2008/5: Certain borrowings by self managed superannuation funds
Date of issue: 4 April 2008
Status: Current


Description: The Alert applies to arrangements which have the following features: 1. The trustee of the SMSF ("the trustee") borrows money to acquire an asset. 2. The asset acquired (or any replacement asset) is held on trust so that the trustee acquires a beneficial interest in it. 3. The legal interest in the asset (or any replacement) is held by the trust as security for the borrowed money. 4. The trustee has the right to acquire legal ownership of the asset (or any replacement) by making one or more payments after acquiring the beneficial interest. 5. The borrowing is of a limited-recourse nature, noting particularly that any recourse that the lender has under the arrangement against the trustee must be limited to rights relating to the asset acquired (or any replacement). In other words, the lender is able to recover monies where there is a default on the borrowing by repossessing or disposing of the asset acquired (or any replacement), but cannot recover such monies through recourse to the SMSF's other assets. 6. The arrangement has one or more of the following features: (a) The interest rate for the borrowing is zero or less than a commercial rate, particularly where the lender is a related party; (b) The interest rate for the borrowing exceeds a commercial rate, particularly where the lender is a related party; (c) Interest on the borrowing is able to be capitalised; (d) A personal guarantee for the borrowing is given by a third party, particularly where the guarantee is given by a member or a related party of the SMSF; (e) The asset acquired (or any replacement) is one that a trustee is prohibited from acquiring under the SIS Act or any other law, or under the SMSF's governing rules (for example, acquiring residential property, which is not business real property, from a related party). | 1. The trustee of the SMSF ("the trustee") borrows money to acquire an asset. 2. The asset acquired (or any replacement asset) is held on trust so that the trustee acquires a beneficial interest in it. 3. The legal interest in the asset (or any replacement) is held by the trust as security for the borrowed money. 4. The trustee has the right to acquire legal ownership of the asset (or any replacement) by making one or more payments after acquiring the beneficial interest. 5. The borrowing is of a limited-recourse nature, noting particularly that any recourse that the lender has under the arrangement against the trustee must be limited to rights relating to the asset acquired (or any replacement). In other words, the lender is able to recover monies where there is a default on the borrowing by repossessing or disposing of the asset acquired (or any replacement), but cannot recover such monies through recourse to the SMSF's other assets. 6. The arrangement has one or more of the following features: (a) The interest rate for the borrowing is zero or less than a commercial rate, particularly where the lender is a related party; (b) The interest rate for the borrowing exceeds a commercial rate, particularly where the lender is a related party; (c) Interest on the borrowing is able to be capitalised; (d) A personal guarantee for the borrowing is given by a third party, particularly where the guarantee is given by a member or a related party of the SMSF; (e) The asset acquired (or any replacement) is one that a trustee is prohibited from acquiring under the SIS Act or any other law, or under the SMSF's governing rules (for example, acquiring residential property, which is not business real property, from a related party). | (a) The interest rate for the borrowing is zero or less than a commercial rate, particularly where the lender is a related party; (b) The interest rate for the borrowing exceeds a commercial rate, particularly where the lender is a related party; (c) Interest on the borrowing is able to be capitalised; (d) A personal guarantee for the borrowing is given by a third party, particularly where the guarantee is given by a member or a related party of the SMSF; (e) The asset acquired (or any replacement) is one that a trustee is prohibited from acquiring under the SIS Act or any other law, or under the SMSF's governing rules (for example, acquiring residential property, which is not business real property, from a related party). | FEATURES WHICH CONCERN US | The Tax Office considers that arrangements which exhibit one or more of the features outlined in paragraph 6 above may give rise to taxation and superannuation regulatory issues, including whether: 1. monies advanced by a member or related party at zero or less than a commercial rate of interest could be characterised as a contribution to the SMSF. This may result in the trustee/member having to pay excess non-concessional contributions tax under Division 292 of the Income Tax Assessment Act 1997 ; 2. monies advanced by a member or related party at greater than a commercial interest rate of interest may result in: a) a breach of the sole purpose test outlined in section 62 of the SIS Act, on the basis that the excessive interest rate may mean that the SMSF is not being maintained solely for the purpose of providing superannuation benefits, and/or b) the trustee breaching paragraph 65(1)(b) of the SIS Act, which prohibits the trustee from giving financial assistance to a member of the SMSF or to a relative of such a member using the resources of the SMSF; 3. interest capitalised may result in the arrangement failing to meet the requirement that the money borrowed is or has been applied for the acquisition of an asset under paragraph 67(4A)(a) of the SIS Act; 4. a personal guarantee of the type outlined in paragraph 6 (d) above may result in recourse being made to the assets of the SMSF other than the asset acquired (or any replacement) in the event that the guarantee is enforced against the trustee as the principal debtor, contrary to the intent that the exception in subsection 67(4A) of the SIS Act only applies to limited recourse borrowings; and 5. an asset of the type outlined in paragraph 6 (e) may result in breaches of the SIS Act or SIS Regulations (for example, intentionally acquiring an asset from a related party, which breaches subsection 66(1) of the SIS Act). | 1. monies advanced by a member or related party at zero or less than a commercial rate of interest could be characterised as a contribution to the SMSF. This may result in the trustee/member having to pay excess non-concessional contributions tax under Division 292 of the Income Tax Assessment Act 1997 ; 2. monies advanced by a member or related party at greater than a commercial interest rate of interest may result in: a) a breach of the sole purpose test outlined in section 62 of the SIS Act, on the basis that the excessive interest rate may mean that the SMSF is not being maintained solely for the purpose of providing superannuation benefits, and/or b) the trustee breaching paragraph 65(1)(b) of the SIS Act, which prohibits the trustee from giving financial assistance to a member of the SMSF or to a relative of such a member using the resources of the SMSF; 3. interest capitalised may result in the arrangement failing to meet the requirement that the money borrowed is or has been applied for the acquisition of an asset under paragraph 67(4A)(a) of the SIS Act; 4. a personal guarantee of the type outlined in paragraph 6 (d) above may result in recourse being made to the assets of the SMSF other than the asset acquired (or any replacement) in the event that the guarantee is enforced against the trustee as the principal debtor, contrary to the intent that the exception in subsection 67(4A) of the SIS Act only applies to limited recourse borrowings; and 5. an asset of the type outlined in paragraph 6 (e) may result in breaches of the SIS Act or SIS Regulations (for example, intentionally acquiring an asset from a related party, which breaches subsection 66(1) of the SIS Act). | a) a breach of the sole purpose test outlined in section 62 of the SIS Act, on the basis that the excessive interest rate may mean that the SMSF is not being maintained solely for the purpose of providing superannuation benefits, and/or b) the trustee breaching paragraph 65(1)(b) of the SIS Act, which prohibits the trustee from giving financial assistance to a member of the SMSF or to a relative of such a member using the resources of the SMSF; | Trustees are also reminded that existing fund assets cannot be placed into a limited recourse borrowing without breaching the SIS regulatory requirements. | The Australian Taxation Office is examining these arrangements. | For further information on the Tax Office's current views regarding the exception provided to certain limited-recourse borrowings under subsection 67(4A) of the SIS Act refer to Instalment warrants and super funds - questions and answers . | Date of Issue: 4 April 2008 | Date of Effect: 4 April 2008 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: self managed superannuation fund sole purpose personal guarantees limited recourse borrowings financial assistance borrowing instalment warrants | Legislative References: Superannuation Industry (Supervision) Act 1993 62 65(1)(b) 66(1) 67(4A) 67(4A)(a) Superannuation Industry (Supervision) Regulations 1994 Income Tax Assessment Act 1997 Division 292 | Related Taxpayer Alerts: | Contact Officer: Stuart Forsyth Business Line: Superannuation Phone: (07) 3149 5504





Related documents: PS LA 2005/13 - Taxpayer Alerts | 62 | 65(1)(b) | 66(1) | Superannuation Industry (Supervision) Regulations 1994 | Division 292 | None

This Taxpayer Alert is concerned with arrangements under which the trustee of a self managed superannuation fund (SMSF) enters into certain limited-recourse borrowings, which may not meet the conditions in subsection 67(4A) and/or breach other provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act), as well as related superannuation rules. | This Taxpayer Alert does not deal with taxation issues other than those relating to the application of the superannuation law.