30/07/2012

Section 67A of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SIS Act’) requires that there be a borrowing of money applied to the acquisition of a single acquirable asset as part of the limited recourse borrowing arrangements (‘LRBA’). 

When your client or a related party decides to lend (or on-lend) money to the trustee of the fund they must be cautious to ensure that the loan is conducted in a manner which is not only acceptable under s109 of the SIS Act but is actually a ‘loan’ rather than a ‘financial accommodation’. 

In Self Managed Superannuation Funds Ruling 2009/2 ("the Ruling") the ATO explained the meaning of the phrase ‘borrow money’ for the purposes of section 67 of the SIS Act. 

The borrowing of money or the making of a loan is defined as having two necessary requirements:
(i)    a temporary transfer of an asset (in most cases cash) from a lender to a borrower; and
(ii)   an obligation or an intention to return the temporarily transferred asset to the lender.
For the purposes of section 67 of the SIS Act the asset must be money.

When discussing different types of financing arrangements, the Ruling refers to Prime Wheat Association Ltd V Chief Commissioner of Stamp Duties (1997) 42 NSWLR 505: "the fact that a debt or some other form of financial accommodation exists is not in itself sufficient to characterise an arrangement as a borrowing of money".

This case went on to state that when there is no advance of money there can be a debt without it being a loan. 

It is imperative that if a related party is to make a loan that the actual money is transferred out of their account, presented at settlement as payment on behalf of the SMSF trustee and then received by the Vendor in satisfaction of part or all of the balance owing on the property. Journal entries or set offs clearly do not meet the requirements of a loan or borrowing.

The consequences on the limited recourse borrowing arrangement if the related party loan is found to be an accommodation rather than a loan (borrowing) is that the holding trust may fall outside the exception provided by s71(8) which excludes the holding trust from being considered an in house asset. The whole transaction would be non-compliant.

If you have any questions in relation to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.