In a previous Alert, we posed the question as to whether the exemption to the in-house asset rules in section 71(8) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) would continue to apply where the loan under a limited recourse borrowing arrangement (LRBA) is repaid, but the asset is retained by the custodian rather than being transferred to the trustee of the self managed superannuation fund (SMSF).
The ATO has recently answered this question with the publication of the Self Managed Superannuation Fund (Limited Recourse Borrowing – In-House Asset Exclusion) Determination 2014 legislative instrument (Instrument).
In this Alert, Partner Luke Mountford, Senior Associate Rosalie Cattermole and Associate Laura Hanrahan examine the new Instrument and discuss what effects it will have on SMSFs.
The problem
An in-house asset includes an asset of a superannuation fund that is an investment in a related trust of the fund. Section 71(8) of the SIS Act provides an exemption for an investment in a related trust in connection with a borrowing covered by section 67A(1) of the SIS Act.
Given the requirement that the investment in the related trust be "in connection with a borrowing arrangement", the question arose as to whether the in-house asset exemption would continue to apply if the borrowing was repaid in full and the asset remained registered to the custodian.
Effect of Instrument
The Instrument has clarified the position by providing that an asset of an SMSF that is an investment in a related trust is not an in-house asset of the fund at a time (the test time) where:
- the application of section 71(8) of the SIS Act resulted in the investment asset not being an in-house asset of the fund at all times, from when the related trust began to hold the asset until the relevant borrowing was repaid; and
- the application of section 71(8) of the SIS Act would result in the investment not being an in-house asset of the fund at the test time, but for the fact that the borrowing has been repaid.
In other words, if the exemption in section 71(8) applied up until the time that the borrowing was repaid, the fact that the borrowing has been repaid will not stop the exemption from applying and result in the investment becoming an in-house asset.
The Instrument also clarifies the position in relation to investments in related trusts of funds that would be exempt from being in-house assets but for the fact that the borrowing has not yet begun and the related trust does not yet hold the asset.
In those circumstances, provided that it is reasonable to conclude that:
- such a borrowing will occur;
- that the related trust will hold the asset; and
- the exemption under section 71(8) would apply to exempt the investment from being an in-house asset from the time the related trust begins to hold the asset, then
the investment will not be an in-house asset at that time.
The Instrument is taken to have commenced on 24 September 2007, which was the date of effect of the provisions in the SIS Act that allowed trustees of superannuation funds to enter into LRBAs.
In light of the Instrument confirming that the exemption will continue to apply after the borrowing has been repaid, there is no need for hesitation in paying out borrowings in full.
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