Self-managed super funds (SMSFs) are generally not designed to borrow – they exist in order to save, not to get into debt! But a special arrangement does exist that allows DIY super funds to borrow to invest.
This is called a Limited Recourse Borrowing Arrangement (LRBA), and while any part of this loan is outstanding, the asset purchased must be held in a Holding Trust, which is subject to strict rules.
One of those rules requires that the borrowed funds must be used to buy a ‘single acquirable asset’.
That’s pretty straight forward if the asset is real estate because it typically involves a single property over one clear title. But what does a ‘single acquirable asset’ mean when purchasing shares?
How it works
The single acquirable asset rule actually allows more than one asset to be held as long as they are identical and all have the same value. A parcel of shares passes this test. The assets have to be acquired as a collection of similar assets and need to be sold down as a collection of assets.
But buying shares isn’t always that simple.
Recently, the Australian Taxation Office (ATO) was asked what happens if a trustee places an order to buy shares of the same class in a company using an LRBA, but that order is filled using more than one order with different purchase prices.
That is, the shares are all identical but the initial value isn’t the same. Although, clearly once acquired, they are all the same and all have the same market value.
The Tax Office says that in its view, acquiring assets in more than one parcel seems to be contrary to the intent of the LRBA legislation because they’re not all purchased as a single collection of assets.
That said, the ATO goes on to say, that it is “prepared to ignore short delays in fulfilling a single on-market order to purchase shares or the fact that fulfilling a single on-market order to purchase shares at the prevailing market price may result in some of those shares being acquired at different prices.”
Put simply, the ATO will allow such a transaction as long as the share purchase was originally placed as a single order. However, it stresses, that multiple orders, to either buy or sell, remain unacceptable.
“In keeping with the policy intent of the relevant provisions, the ATO will not allow a trustee of a self-managed superannuation fund to embark on a course of action to accumulate or sell down shares over a period of time (even shares of the same class in a single company) or to enter into an arrangement with that anticipated result. For example, it would not be acceptable to acquire a collection of shares under an LRBA through more than one purchase order.”
Overall this is good commonsense outcome.
The Tax Office notes that if you’re unsure how the above applies to your particular circumstances, you could consider applying to the ATO for SMSF Specific Advice for your proposed transaction.
Real estate and LRBAs
On another note, the ATO has also made some clarifications about Limited Recourse Borrowing Arrangements and three potential problems that it has identified regarding real estate purchases. These are:
- Doubt over which entity should hold the loan (it’s the super fund);
- Contracts being executed by the wrong party (this must be the trustee of the Holding Trust);
- No loan documentation (you need it).
These issues not only create a super law regulatory headache, but they might also mean unnecessarily paying State or Territory duty more than once on these transactions.
While LRBAs open up a world of opportunities to SMSFs, they need to be navigated carefully. Before you implement an LRBA, please make sure you receive good advice.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.