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Generally, there is a prohibition on superannuation funds borrowing money. However, an exception to this rule enables self-managed superannuation funds (SMSFs) to borrow in order to acquire certain assets. These borrowing arrangements, though, are strictly regulated. When borrowing to acquire an asset, the fund takes out a loan on a ‘limited recourse’ basis, which is a term that indicates the security of the lender is only in respect of the encumbered asset that has been acquired. In other words, the lender cannot make claims on other assets that the SMSF may own. With a ‘limited recourse borrowing arrangement’ (LRBA), the SMSF has beneficial ownership of the asset (keeps the earnings the asset makes), but not ‘legal’ ownership. Upon discharge of the loan, legal title vests with the SMSF. The ruling issued by the Tax Office last year has come as a welcome clarification for many SMSF trustees, as the Commissioner has explained his interpretation of key concepts, including: • What is a ‘single acquirable asset’ • ‘maintaining’ or ‘repairing’ the acquirable asset as distinguished from ‘improving it’ • When a single acquirable asset is changed to such an extent that it is a different (and therefore a replacement) asset. The Tax Office’s pronouncements clarify situations where there may be two separate assets at law, but because they are inseparable for all practical purposes they will be treated as a single asset when it comes to an SMSF borrowing. The Tax Office has also distinguished between repairs that are carried out to ‘reinstate the function of an asset’ compared with an improvement that enhances that asset. The definition of a single acquirable asset also considers both proprietary rights and the object of ownership, thus allowing for an asset to meet the definition of a single asset even though it may consist of separate items of proprietary rights. The definition also takes into account whether a state or territory law requires that two assets be dealt with as one. The difference between maintenance, improvements and replacements can be very difficult to determine in some instances. An important distinction to remember is that in some situations repairs can be paid for from LRBA funds, but, if permitted, improvements must be paid for from other sources, such as the fund members’ own resources. However, even where improvements are made, many popular improvements are permitted that will still not create a different (replacement) asset. As an avenue to use borrowed funds for investment purposes, LRBAs are very important to many SMSFs, but failing to meet the strict requirements risks contravening the general prohibition on borrowing funds, and places at risk an SMSF’s status as a complying superannuation fund. Operating within the rules becomes an absolute imperative. For more information about Nursing Professional Liability Insurance and Medical Insurance Australia please visit our website http://www.taxforhealthprofessionals.com.au/
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