When is an asset of an SMSF deemed to be an ‘In-House Asset’ when borrowing to invest?

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Since superannuation funds have been allowed to borrow from September 2007, we have seen many of our clients undertake limited recourse borrowing (LRBA) as an investment option to help drive their wealth accumulation strategies.

But were you aware that the following scenarios could result in the in-house asset provisions being breached?
The holding trust (also known as a bare trust) has been established, but the asset has not been acquired as yet (for example when purchasing a property “off the plan”).
Or, the loan has been repaid, but the property has not been transferred from the holding trust to the Fund.


The In-House Asset Rules and Borrowing in Super – how do they relate?

One of the definitions of the in-house asset provisions in the SIS Act, is where a superannuation fund invests in a related trust. A holding trust is considered a related trust of the fund, however, a specific exemption applies where there is a limited recourse borrowing arrangement in place.

Very important to note though – If the asset under the borrowing arrangement would normally be considered in-house of the fund, then this will not be protected under the exemption.

What a lot of practitioners nor their clients, may not realise, is that the ATO has interpreted the exemption to mean that whilst the loan is in place, there will not be an in-house asset, however there will be an issue once the loan has been repaid and the asset is not transferred from the holding trust to the Fund.

If the ATO is taking this approach, there could be very serious implications for Funds which have not transferred the property from the holding trust, particularly if the ATO decided to make the Fund non-complying.

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So why not just transfer the property when the Loan is repaid? You ask.

Often with a borrowing, a small amount or even just the loan facility is left open once the loan is repaid, for the purposes of easy redraw opportunities (and using the equity that has accumulated). However, this is not permitted with a superannuation fund borrowing arrangement.

So why not just transfer the asset when the loan is repaid?

In some states and territories, there is the potential for double stamp duty in a borrowing arrangement in an SMSF. Firstly, when the property is purchased, and secondly, when the property transfers from the Holding trust into the fund.
What is being done to Rectify the Issue?

The ATO has released a draft legislative instrument which will extend the exemption to apply even after the loan has been repaid. As a result, even if the loan is fully repaid, the property will be able to remain in the holding trust if the Trustee of the Fund wishes this to be the case.

This instrument will also help overcome the issue if the Trustee borrows money to pay for the deposit on an “off the plan” property, which does not settle for a period of time until the property is constructed.


Should you have any questions or wish to discuss your financial options, feel free to:

Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.

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