SPAA urges caution on new borrowing rules

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The Self Managed Super Funds Professionals’ Association of Australia (SPAA) has today reminded SMSF advisers and trustees about the tough new measures which apply to limited recourse borrowing arrangements put in place on or after 7 July 2010. Peter Burgess, SPAA National Technical Director, said the most significant and controversial changes to the rules include the requirement for borrowed funds to be used to obtain a “single acquirable asset” and the restrictions imposed on replacing or improving the asset once it has been acquired.

The changes to the limited recourse borrowing rules for SMSFs apply to arrangements put in place on or after July 7, 2010 or to refinances of existing loans on or after 7 July.

Pre 7 July 2010, more than one asset could be acquired and assets did not have to be the same form or type in order to undertake a single limited recourse borrowing arrangement. For instance, a portfolio of
shares in different companies could be acquired under a single arrangement

“We believe the definition of a single acquirable asset may catch out SMSF members who are not aware of the legislative changes,” said Mr Burgess. “This is because the changes mean separate borrowing
arrangements must be in place for shares in different companies or even different classes of shares in one company, with compliance potentially messier than when dealing with property.”

The acquisition of real property on separate titles is also not permitted unless a separate borrowing arrangement is put in place for each title. For example, several residential units in the same apartment
complex with the same characteristics will need separate borrowing arrangements.

“The Australian Taxation Office (ATO) has recently advised that where assets are for practical purposes inseparable, or where there is an incidental ancillary asset of a very low value, the assets may be treated
as one asset. However, it is still unclear how this will be determined so SPAA believes advisers and trustees should proceed on the basis that each title represents a separate asset,” Mr Burgess said.

“The single acquirable asset rules have implications for advisers and trustees regarding the way in which assets can be acquired and the number of borrowing arrangements which may need to be put in place,”
he said.

Another contentious issue concerns improvements to properties for which limited recourse borrowing arrangements have been put in place after 7 July 2010. In essence, renovations or improvements are not
permitted as they may give rise to a different asset to the single acquirable asset that was the subject of the arrangement. Importantly, this would be the outcome regardless of the source of the funds used to
renovate or improve the asset.

“In the context of real property, the inability to improve the asset during the life of the loan is a significant issue and extreme care should be exercised where it is the intention of an SMSF trustee to alter a
property acquired under a limited recourse borrowing arrangement,” Mr Burgess said.

If the property is improved, the limited recourse borrowing arrangement will have to cease and the improved property transferred to a new borrowing arrangement. In situations where it is the intention of
SMSF trustees to improve a business real property, Mr Burgess said the parties could consider an agreement with the vendor to do this before the SMSF purchases it and consider adding this to the sale
price of the property.

“The rules which apply to a limited recourse borrowing arrangement put in place on or after 7 July 2010 are much more restrictive than the previous rules which applied to arrangements put in place prior to 7
July 2010. Trustees looking to use the limited recourse borrowing rules should seek sound advice from a SPAA Specialist Adviser to fully understand the opportunities and the risks involved,” Mr Burgess said.

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