More good news for SMSF borrowing arrangements

The Government has released its response to the Financial System Inquiry Final Report with positive news for SMSFs engaged in or considering limited recourse borrowing arrangements (LRBA).

This news builds on the encouragement provided by recent legislative changes to the tax treatment of LRBAs.

The Inquiry

The Financial System Inquiry (FSI) commissioned Mr David Murray to provide the government with recommendations regarding the financial system. In Mr Murray’s final report, which was released on 7 December 2014, a total of 31 recommendations were made to the Government across a number of areas.

Of particular interest to those involved with SMSFs was the recommendation that the Government should ban LRBAs in totality. Mr Murray’s concerns stemmed from the increased risk that leverage in superannuation poses, given the purpose of superannuation as a ‘saving’ mechanism.

Many within the SMSF industry rebutted Mr Murray’s concerns, and were critical of proposed interference with the right of SMSF members to invest in a particular asset class, or to leverage a particular investment, without considering alternatives other than a complete ban (eg, a suitability model).

Others considered that the insignificant proportion of SMSF assets (ie, approximately 1.65% of all SMSF assets)1 that were invested using this ‘risky’ strategy did not justify the significant policy intervention that was being proposed.

The Response

On 20 October 2015, the Government responded to Mr Murray’s report agreeing with 30 out of 31 recommendations, as well as making three further recommendations of its own volition.

The one recommendation that the Government did not agree with was Mr Murray’s recommendation to prohibit direct borrowing, and in particular LRBAs, by superannuation funds.

The Government did not consider the data sufficient to justify significant policy intervention at this time, but has tabled the issue for reconsideration by providing a commitment to commission the Council of Financial Regulators and the Australian Taxation Office to monitor leverage and risk in the superannuation system and report back in three years.

The Government is presumably expecting that a three year period will produce stronger data, given the better reporting that is now available to the Australian Taxation Office (ATO) through its improved tax return systems which allows them to better capture information about the type of investments held by SMSFs.

Tax treatment of LRBAs

There was other good news on the LRBA front in September when the Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 (Cth) (Act) was enacted, which finally clarified the tax treatment of trusts established for the purposes of LRBAs.

Trusts established to hold fund assets for the purposes of an LRBA are referred to in the industry by a number of different names including custodian, holding, security or bare trusts; however these terms essentially all carry the same meaning. Similarly, the trustee of this trust might be referred to as a custodian, holding, bare or security trustee, and again all of these terms are used interchangeably. In this article, we use the terms ‘security trust’ and ‘security trustee’.

To date, many tax practitioners have treated trusts established for LRBA purposes as being non-existent for tax purposes. In particular these practitioners would treat any income or expenses that were incurred or received by the security trustee as being, for tax purposes, incurred or received by the SMSF trustee.

While this practice has been widely endorsed by both taxation and legal practitioners, and appeared to be accepted by the ATO, it relied on various principles applicable to bare trusts and in relation to absolute entitlement. There was always the risk that, in some cases, the security trust might need to be treated as an entity for tax purposes.

With the introduction of the Act, the concern that the security trust might be a tax entity is now allayed, as the Act formally implements the ‘look through’ approach. As a consequence, the security trust is ignored for taxation purposes and the SMSF trustee is taken to have done the acts of the security trustee. This means that the SMSF trustee will be liable for all income tax consequences associated with the asset, including with respect to dividends and franking credits.

Importantly, the ‘look through’ approach also makes it clear that no capital gains tax event happens on the transfer of the asset from the security trustee to the SMSF trustee, or when the SMSF trustee becomes absolutely entitled to the asset upon repayment of the final instalment.

GST was not addressed in the initial draft of the legislation. However, the Act makes it clear that a similar position applies for GST purposes, and all acts done by a security trustee are taken to be done by the SMSF trustee.


The Government’s decision to introduce legislation that ratifies a commonly adopted taxation practice, and its confirmation that there is to be no prohibition or further restriction on LRBAs (pending further review in three years time) provides welcome certainty in relation to a strategy that many consider to be a worthwhile option for SMSF members looking to boost their retirement savings.

1Australian Taxation Office, self-managed super fund statistical report – December 2014.


Andrew O’Bryan

Andrew specialises in taxation law. He is a CPA Australia Fellow and Chairman of its Taxation Centre of Excellence.

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