The ATO has released a draft legislative instrument providing a welcome clarification regarding trusts formed to hold property for limited recourse borrowing arrangements.

Section 67A of the Superannuation Industry (Supervision) Act (SIS Act). permits an SMSF to borrow where:

  1. the borrowing is applied to assist the SMSF to acquire a ‘single acquirable asset’;
  2. the legal title to the asset is held on trust for the SMSF until the borrowing is repaid in full; and
  3. the other assets of the SMSF are not charged as security for the borrowing and the loan is ‘limited recourse’.

The instrument has been drafted in response to concerns that an investment by an SMSF in a related trust could be construed as being an ‘in-house asset’ where:

  1. the borrowing had not yet occurred, and the asset was not yet held by the related trust; or
  2. the related trust continued to hold legal title to the asset after the borrowing had been repaid in full.

Under the instrument, an investment by an SMSF in a related trust in compliance with section 67A will be exempt from being an ‘in-house asset’ even in the two circumstances listed above.

The instrument will apply retrospectively, from 24 September 2007 – the date from which SMSF’s became able to borrow directly under Limited Recourse Borrowing Arrangements (LRBAs).