The holding trust in most LRBAs is, under the super law, a related trust to the SMSF investor because the SMSF has an entitlement to the majority of the income from the trust. An investment in a related trust is ordinarily an in-house asset of the fund within the meaning of section 71 of the SISA, subject to certain exceptions.
In-house asset rules exception (borrowing in place)
The interest of the SMSF in the holding trust represents an investment in that trust for the purposes of the in-house asset rules. However, the in-house asset rules have an exception (specifically in subsections 71(8) and 71(9) of the SISA) to ensure that the SMSF's investment in the holding trust is not an in-house asset, provided all the following conditions are satisfied:
- The holding trust is part of an arrangement that meets all of the requirements of the super law in connection with a borrowing by the SMSF.
- The only property of the trust under the arrangement is the acquirable asset (referred to as the original asset or its replacement under the pre-amendment law).
- The asset held by the holding trust would not be an in-house asset of the SMSF if the SMSF owned the asset directly.
See also
- SMSFR 2009/4 Self-Managed Superannuation Funds: the meaning of 'asset', 'loan', 'investment in', 'lease' and 'lease arrangement' in the definition of an 'in-house asset' in the Superannuation Industry (Supervision) Act 1993
In-house asset rules exception (before and after borrowing)
A holding trust trustee can continue to hold the property for the investor after the borrowing has ended.
A legislative instrument made under paragraph 71(1)(f) of the SISA, SPR 2014/1 Self-Managed Superannuation Funds (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014, was registered on 10 April 2014 to address concerns about the application of the in-house asset exemption provided by subsection 71(8) of the SISA.
The legislative instrument provides an exception to the definition of an ‘in-house asset’ during the following times:
- at the beginning of an LRBA where a borrowing has not yet begun or the related trust does not yet hold the acquirable asset; and
- where the asset continues to be held in the related trust after the borrowing has been repaid.
The instrument is taken to have started on 24 September 2007, which aligns with the date of effect of the LRBA provisions. This ensures SMSFs that entered into LRBAs prior to the making of this instrument are not disadvantaged as compared with those that enter into LRBAs after the making of this instrument.
See also
- SMSFR 2009/4 Self-Managed Superannuation Funds: the meaning of 'asset', 'loan', 'investment in', 'lease' and 'lease arrangement' in the definition of an 'in-house asset' in the Superannuation Industry (Supervision) Act 1993
- SPR 2014/1 Self-Managed Superannuation Funds (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014
In-house assets and related party leases
When property owned by the holding trustee is leased to a related party of the SMSF investor, the SMSF's interest in the holding trust is considered to be an in-house asset – unless the leased asset would not be an in-house asset of the SMSF if it were owned by the SMSF directly.
For example, if the leased asset would be business real property of the SMSF if owned directly, then the SMSF's interest in the holding trust is not an in-house asset as long as the LRBA meets all of the requirements of the super law.
In the case of real property that is being leased by the holding trust trustee (for example, so that rent flows to the SMSF trustee) while the borrowing is paid off, the Commissioner takes the view that the existence of the lease does not cause the investment to fail the tests for the special in-house asset rule to apply.
See also
- SMSFR 2009/1 Self-Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993