Acquiring assets from a related party vendor
The laws that prohibit the acquisition of assets from related parties apply to LRBAs.
However, the exceptions provided for in the rules against the acquisition of assets from related parties, such as those allowing for the market value acquisition of listed securities or business real property, continue to apply.
This question is different to that where the legal ownership of the asset is transferred from the holding trust to the SMSF once all the instalments are paid.
Assets held on trust for the SMSF
The requirement that the asset be held on trust for the SMSF means the fund acquires an asset from a related party on repaying the borrowing.
It is a necessary feature of an arrangement contemplated that the SMSF be able to acquire full ownership rights over the underlying asset once the borrowing is repaid.
The holding trust that holds the asset underlying an LRBA will generally be a related party of an SMSF investor. In these circumstances, the legal interest in the asset may be considered to be acquired from the holding trust when the borrowing is repaid. We consider that, under the amended laws, this would not contravene the existing prohibition on acquiring assets from related parties.
This question is different to that where the original vendor of the asset is a related party.
Existing fund assets
An SMSF trustee is not allowed to put an existing fund asset into an LRBA.
The money borrowed must be used to acquire a new asset (or replacement asset). This means, for example, that investments under shareholder application or cash extraction arrangements are not allowed. The giving of a charge over an existing asset of the fund, as would generally occur under such arrangements, would result in a contravention of the super law.
Borrowing under an LRBA to build a house on vacant land owned by the fund
An SMSF trustee cannot borrow under an LRBA to build a house or vacant land owned by the fund.
An existing SMSF asset cannot be put into an LRBA. The giving of a charge over an existing asset of the fund (the vacant land), as would generally occur under such arrangements, would contravene the super law.
Cash – representing borrowed money or a deposit
Under the super law, cash representing borrowed money, or a deposit, can be transferred to the holding trust trustee in the circumstances outlined below.
Arrangements entered into on or after 24 September 2007 and before 7 July 2010
Provided the asset purchased by the holding trust trustee using that money is, under the super law, an asset that the SMSF is permitted to acquire.
Arrangements entered into on or after 7 July 2010
Provided the transactions are to facilitate the acquisition of the acquirable asset. This is consistent with the Commissioner's approach to acquisitions in general – refer to paragraph 111 of SMSFR 2010/1.
The super law that applies to these arrangements specifically prohibits the acquirable asset from being money.
See also
- SMSFR 2010/1 Self-Managed Superannuation Funds: the application of subsection 66(1) of the Superannuation Industry (Supervision) Act 1993 to the acquisition of an asset by a self-managed super fund from a related party
Holding trust trustee operating a cash account
The holding trust trustee can operate a cash account for an arrangement entered into on or after 7 July 2010 provided the cash account is not part of the acquirable asset. That is, it is acceptable for the holding trust trustee to operate a cash account to deal with income, expenses and so on. It would not be acceptable for the holding trust to operate a cash account as a trading account for investment purposes.
Using an LRBA to buy a spread of blue-chip shares
Arrangements entered into on or after 7 July 2010
Separate arrangements must be used for shares in different companies or different classes of shares in a company.
The asset being acquired under one arrangement must be either a:
- single asset
- collection of assets that are identical, have the same market value as each other, and are treated as a single asset (that is, bought and sold together as a collection) – for example, a collection of shares of the same class in a single company.
Arrangements entered into on or after 24 September 2007 and before 7 July 2010
More than one asset may be acquired under a particular arrangement. The assets acquired need not be all of the same form or type. Thus, a portfolio of shares in different companies can be acquired under a single arrangement.
SMSF using an LRBA to purchase exchange traded options over shares
Arrangements entered into on or after 7 July 2010
SMSFs can use an LRBA to purchase exchange traded options over shares, however the arrangement must be ended at or before the time the options are replaced by another asset (such as cash or shares). The conversion of an option to another asset is not a permitted replacement asset within an LRBA.
Arrangements entered into on or after 24 September 2007 and before 7 July 2010
SMSFs can use an LRBA to purchase exchange traded options over shares and if it is permitted under the terms of the particular arrangement the options may be exercised on behalf of the SMSF trustee while still within the LRBA.
Assets bought and sold on behalf of the investor within the holding trust of an LRBA
Arrangements entered into on or after 7 July 2010
Assets cannot be bought and sold on behalf of the investor within the holding trust of an LRBA. The super law applying to these arrangements restricts replacement of the asset (or collection of identical assets) within an arrangement to circumstances specifically listed in the law.
It is not permitted for a portfolio of assets to be managed within an LRBA.
Arrangements entered into on or after 24 September 2007 and before 7 July 2010
Assets can be bought and sold on behalf of the investor within the holding trust of an LRBA. The replacement assets will take the place of the original asset in the arrangement and all other aspects of the arrangement must continue to satisfy the requirements of the super law. The replacement asset is not limited to any particular type of asset but must be an asset that the SMSF trustee is not prohibited from acquiring.
Retaining shares issued under a dividend reinvestment plan
Arrangements entered into on or after 7 July 2010
Shares issued under a dividend reinvestment plan cannot be retained in the arrangement. For an arrangement over a collection of shares, if additional or bonus shares are issued for that collection of shares, they cannot simply be added to the collection as that is not a permitted replacement asset. If the arrangement is to continue, the additional shares need to be transferred out of the arrangement – for example, in a similar way that a cash dividend might be.
Arrangements entered into on or after 24 September 2007 and before 7 July 2010
Shares issued under a dividend reinvestment plan can be retained in the arrangement. The new portfolio will take the place of the original asset in the arrangement. All other aspects of the arrangement must continue to satisfy the requirements of the super law.
SMSF trustees acquiring more than one real property title under a single LRBA
Arrangements entered into on or after 7 July 2010
Multiple real property titles cannot generally be acquired under a single LRBA. However, acquisition under a single LRBA may be possible if it is reasonable to conclude that what is being acquired is distinctly identifiable as a single asset. Factors relevant in determining if this is the case are set out at paragraphs 12 and 13 of SMSFR 2012/1.
See also
- SMSFR 2012/1 Self-Managed Superannuation Funds: limited recourse borrowing arrangements – application of key concepts
Arrangements entered into on or after 24 September 2007 and before 7 July 2010
An SMSF trustee can acquire more than one real property title under a single LRBA.