Draft legislation released: limited recourse borrowing arrangements

January 30, 2015

limited recourse borrowing

Treasury released draft legislation recently that will impact limited recourse borrowing arrangements. For full details see http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2015/Look-through-treatment-for-instalment-warrants 

We consider the major changes for SMSFs and limited recourse borrowing arrangements. 


Naturally, in order for a trustee of a superannuation fund to be allowed to borrow, the asset must be held on trust for the trustee of the superannuation fund. To use the exact language of the legislation, the ‘asset [must be] held on trust so that the RSF trustee acquires a beneficial interest in the acquirable asset’.

Accordingly, the legal owner of asset might be one entity, and that entity executes a deed confirming that it owns the asset as a trustee for the trustee of the superannuation fund. In other words, the asset is not actually registered in the name of the trustee of superannuation fund.

Industry often refers to this trust as a bare trust. The ATO however have at times expressed the view that this is not necessarily a bare trust and so they refer to it as a ‘holding trust’. In this article, I will refer to the trust as a ‘bare/holding trust’.

Although the insertion of the bare/holding trust is necessary in order to comply with the limited recourse borrowing arrangement laws in the Superannuation Industry (Supervision) Act 1993 (Cth), it can cause taxation issues.

Some of these issues are detailed below.

Income tax returns

The question is sometimes posed: must the bare/holding trust lodge a separate income tax return?

A strict reading of the law would suggest yes.

However, in ATO Practice Statement Law Administration PS LA 2000/2, the ATO state that no income tax return is needed for a 'Transparent Trust'.

The ATO states that a 'Transparent Trust' is a trust in which the ‘beneficiary of the trust estate has an absolute, indefeasible entitlement to the capital and the income of the trust.’

That being said, the ATO have stated that they don’t necessary believe that an SMSF LRBA bare/holding trust confers absolute, indefeasible entitlement to the capital and the income of the trust. More specifically, in the minutes of the September 2010 National Tax Liaison Group Superannuation Technical Sub-group, the ATO stated:

A holding trust in a limited recourse borrowing arrangement that has a feature that the holding trust trustee has granted a charge over the land (the acquirable asset) to the lender under the arrangement is not strictly a bare trust for that reason alone. This is because contingencies exist, beyond the trustee's lien over the trust property for costs properly incurred in performance of the obligation to safeguard the trust property, which are relevant to transferring the trust property to or at the direction of the SMSF

Other issues

Similar to the income tax return issue detailed above, other issues arise in respect of: 

• Interest — generally, if person A derives income, person B can not claim a deduction for interest on a loan that person B incurs to have bought the asset for person A. Naturally, this reasoning causes an issue in the context of an SMSF limited recourse borrowing arrangement and puts a question mark over an SMSF’s ability to claim the interest deductions.
• Dividends
• Franking credits
• CGT — a transfer from the trustee of the bare/holding trustee to an SMSF trustee on its face triggers CGT event E2. Further, where an SMSF trustee is not absolutely entitled to the bare/holding trust asset (which is consistent with the ATO view stated above), then on payment of the final instalment the SMSF trustee could be seen as becoming absolutely entitled to the bare/holding trust assets as against the bare/holding trustee. As a result, CGT event E5 appears to occur.

The changes

The draft law released is set to clarify that the SMSF trustee should be treated as the owner of the asset of the bare/holding trust, instead of the trustee of the bare/holding trust. This means that the bare/holding trust is ignored and anything that happens to or results from being the owner of the asset, such as receiving dividends and franking credits, affects the SMSF trustee and not the bare/holding trust trustee.

In short, the changes will implement a ‘look through’ situation.Naturally, such changes are positive.

Retrospective effect

Many have been lodging returns etc as if these changes were already law. The legislature acknowledge this, stating:

The long-standing industry practice for certain types of instalment warrants and receipts has been to ignore the trust and to treat the investor as the owner of the asset.

Further, the changes are set to apply retrospectively, from 1 July 2007.

Accordingly, these changes if enacted will clarify that such treatment was appropriate.


The draft legislative changes make no mention of GST.

Presumably, the position in Goods and Services Tax Ruling GSTR 2008/3 can be relied upon. That ruling ‘applies to supplies of real property involving bare trusts and similar trusts’ (emphasis added). Accordingly, even if the ATO view prevails that the bare/holding trust is not a true bare trust, hopefully it would be viewed as similar enough to a bare trust so that GSTR 2008/3 would apply. Where GSTR 2008/3 applies, at the risk of oversimplifying, for GST purposes, the actions of the trustee of the bare/holding trust are imputed to the trustee of the superannuation fund.

Stamp duty

The proposed changes only affect income tax (ie, a Commonwealth tax). As discussed above, they don’t even have any impact upon GST (ie, another Commonwealth tax). Therefore, they certainly don’t change the position in respect of stamp duty, which is of course a matter for the States and Territories.

The laws and the practices in respect of the stamp duty vary from State to State and Territory to Territory. However, a general rule of thumb in states such as Victoria is that the most critical aspect to ensure stamp duty efficiency — and the aspect most commonly botched — is that the deposit is paid from a bank account in the name of the SMSF.

Again, the proposed changes have no impact in respect of stamp duty. Accordingly, it is still just as critical as ever that great care be taken in respect of stamp duty issues.

By Bryce Figot, director, DBA Lawyers

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Call the team at Leenane Templeton on (02) 4926 2300 or email us

If you would like to discuss borrowing arrangements or SMSF's in general with our expert team, please do not hesitate to give us a call. 

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