IN 2007 the law was amended to allow superannuation funds to borrow to acquire large assets such as a residential or commercial property.
Prior to the law change, super funds were only able to borrow in very limited circumstances, such as to pay a benefit to a beneficiary.
The amount that could be borrowed was limited to 10% of the market value of the super fund's assets and the borrowing period was restricted to seven days for the settlement of securities and 90 days for the other circumstances.
Super funds can still borrow for the traditional purposes of settling affairs with beneficiaries or dealing with super surcharges.
However, the borrowing provision was broadened to allow the purchasing of large assets in 2007 which was referred to as instalment warrants.
Then in 2010 the instalment warrants law was amended and renamed Limited Recourse Borrowing Arrangements.
Ten years later we see this aspect of super has become increasingly important; in Wealth (The Australian) recently, Graham Moroney from the SMSF Association showed how allocations among DIY funds to LRBAs now represent about 4% of total holdings.
Under a LRBA, a self-managed super fund can borrow to acquire real property.
The mechanism of the LRBA is to ensure that the risk of borrowing is quarantined to the specific asset that is acquired via borrowings. This protects the remaining assets of the SMSF in the event the SMSF is unable to repay the loan.
LRBAs can only be used to purchase a single acquirable asset. This means the SMSF trustee will need to ensure that the property is on a single title.
If the property is on more than one title, it will be treated as a single asset only if there is a unifying physical object, such as a fixture, attached to the land that is permanent in nature, can't be easily removed and is significant in value relative to the property.
If there is a requirement under a law of a state or territory that the two assets must be dealt with together, then it could also be treated as a single asset.
If the fixture is temporary in nature or otherwise able to be relocated or removed relatively easily then it can't be treated as a single asset.
One area SMSF members need to be aware of is that the sale of some residential properties can sometimes include a furniture package as part of the property acquisition.
Where the contract of sale includes furniture, the acquisition will not comply with the legal provisions of the LRBA. This is because each item of furniture would be considered a separate asset.
A contract for the acquisition of the property alone would be acceptable, whereas, the inclusion of a furniture package in the same contract would not.
One solution would be to have the SMSF borrow to acquire the property without the furniture and use the SMSF's own money to purchase the furniture package under a separate agreement.
Fixtures, on the other hand, are treated differently. These comprise part of the title so would not be considered separate assets if they are permanent in nature and cannot be easily removed.
Chattels such as furniture packages can be picked up and removed and are separate from the property and each in themselves is a single asset.
If the chattels are to be acquired, an SMSF will need separate LRBAs for each chattel.
While LRBAs provide SMSFs with the opportunity to acquire large assets, SMSF members must be careful to structure them correctly and follow legal provisions.
Failure to do so could result in a costly mess for their SMSF.
Monica Rule is the author of SMSFs and Properties. For more information, go to www.monicarule.com.au