Acquiring assets from a related party
The restrictions on acquiring assets from related parties apply to limited recourse borrowing arrangements (LRBAs).
Exceptions are provided 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.
For more information on the acquisition of an asset by a SMSF from a related party, see 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.
Assets held on trust for the SMSF
While the holding trust is a related trust, the SMSF can acquire legal ownership of the asset from the holding trust once the LRBA has been repaid without breaching super laws.
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 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 super law.
An SMSF is also not allowed to borrow under an LRBA to improve an existing fund asset, such as building a house on vacant land owned by the SMSF.
Cash representing borrowed money or a deposit
Under super law, cash representing borrowed money or a deposit can be transferred to the holding trust depending on when the arrangement was entered.
Arrangements entered from 7 July 2010
Borrowed money can be transferred to the holding trust if it is for the purpose of acquiring the asset that the SMSF is permitted to acquire. However, the acquirable asset must not be money.
The holding trust can operate a cash account for an arrangement provided the cash account is not part of the acquirable asset. This means it is acceptable for a cash account to deal with income and expenses. It would not be acceptable to operate a cash account as a trading account for investment purposes.
Arrangements entered between 24 September 2007 and 6 July 2010
Borrowed money can be transferred to the holding trust if the asset purchased using that money is an asset that the SMSF is permitted to acquire.
Using an LRBA to buy blue-chip shares
The rules on borrowing under an LRBA to buy shares from large, reputable companies will depend on when you entered the arrangement.
Arrangements entered from 7 July 2010
Separate arrangements must be used for shares in different companies or different classes of shares in a company. You cannot acquire a portfolio of shares in different companies under a single LRBA.
Arrangements entered between 24 September 2007 and 6 July 2010
More than one asset may be acquired under a particular arrangement. The assets acquired do not need to be all the same form or type.
Using an LRBA to purchase exchange traded options
The rules on borrowing under an LRBA to buy exchange traded options over shares will depend on when you entered the arrangement.
Arrangements entered from 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 between 24 September 2007 and 6 July 2010
SMSFs can use an LRBA to purchase exchange traded options over shares. If it is permitted under the terms of the 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
The rules on assets bought and sold on behalf of the investor within the holding trust on an LBRA will depend on when you entered the arrangement.
Arrangements entered from 7 July 2010
Assets cannot be bought and sold on behalf of the investor.
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 between 24 September 2007 and 6 July 2010
Assets can be bought and sold on behalf of the investor.
The replacement assets will take the place of the original asset in the arrangement. All other aspects of the arrangement must continue to meet the requirements of 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
The rules on retaining shares issued under a dividend reinvestment plan will depend on when you entered the arrangement.
Arrangements entered from 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 they cannot 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 between 24 September 2007 and 6 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 meet the requirements of super law.
Acquiring more than one real property title
The rules on acquiring more than one real property title under an LRBA will depend on when you entered the arrangement.
Arrangements entered from 7 July 2010
Multiple real property titles cannot 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.
'Distinctly identifiable' means a collection of assets that are identifiable, have the same market value as each other and are treated as a single asset that is bought and sold together. Real property on separate titles is not allowed even if the properties are substantially the same.
For more information on relevant factors in determining a single asset, see paragraphs 12 and 13 of SMSFR 2012/1 Self-Managed Superannuation Funds: limited recourse borrowing arrangements – application of key concepts.
Arrangements entered between 24 September 2007 and 6 July 2010
An SMSF trustee can acquire more than one real property title under a single LRBA.