Self-managed super fund (SMSF) trustees need to be aware of new limited recourse borrowing arrangements effective from 7 July, 2010, according to the Self Managed Super Funds Professionals’ Association of Australia (SPAA).
The requirement for borrowed funds to be used to obtain a “single acquirable asset” and the restrictions imposed on replacing or improving the asset once it has been acquired are the most significant, according to SPAA national technical director Peter Burgess.
Previously, more than one asset could be acquired and assets did not have to be the same form or type in order to undertake a single limited recourse borrowing arrangement, according to SPAA.
“The changes mean separate borrowing arrangements must be in place for shares in different companies or even different classes of shares in one company, with compliance potentially messier than when dealing with property,” Burgess said.
The acquisition of real property on separate titles also requires a separate borrowing arrangement to be put in place for each title, but where assets are inseparable they may be treated as one asset. As it is still unclear how this will be determined, SPAA believes advisers and trustees should act as if each title represents a separate asset, Burgess said.
Renovations or improvements will also not be permitted to properties for which limited recourse borrowing arrangements have been put in place as they may give rise to a different asset to the original one, regardless of the source of the funds used to renovate or improve the asset.
“In the context of real property, the inability to improve the asset during the life of the loan is a significant issue and extreme care should be exercised where it is the intention of a SMSF trustee to alter a property acquired under a limited recourse borrowing arrangement,” Burgess said.
