Thanks for the very interesting question.

A fractional interest in real estate, where the real estate is on one title, is itself capable of being a “single acquirable asset” for the purpose of section 67A of the SIS Act.

In relation to Regulation 13.14 of the SIS Regulations, this Regulation could be complied with if it was clear that in the hypothetical event of default in relation to the limited recourse borrowing arrangement, that the lender’s only recourse was to the 50% of the real estate held by the bare trust. Or put another way, the super fund’s unencumbered interest would not be sold to pay the outstanding loan balance.

Regulation 13.15 of the SIS Regulations confirms that Regulation 13.14 does not prevent a charge that is expressly allowed or by necessary implication, provided for elsewhere in the SIS Regulations or in the SIS Act.

In ATO ID 2010/172 the ATO considered the apparent mischief of two SMSFs borrowing to each acquire a 50% interest in real estate where there was only one bare trust entity holding 100% of the legal title in relation to the asset jointly acquired by the SMSFs.

In ATO ID 2010/172 it was concluded:

| “Former subsection 67(4A) of the SISA requires an arrangement with a structure that meets the conditions listed in former paragraphs 67(4A)(a) to (e) of the SISA. Former paragraphs 67(4A)(a) and (b) require that under the arrangement the original asset or its replacement is held on trust and that the SMSF trustee must have acquired a beneficial interest in that asset.

| Former paragraph 67(4A)(c) of the SISA further requires that the SMSF trustee must have the right to acquire legal ownership of that asset on making one or more payments. This requires a structure where the investor has an interest through the holding trust in the trust asset ultimately to be acquired by the SMSF trustee under the arrangement.

| In this particular arrangement, the asset held by the holding trust is sole title to the residential property. However, the asset that the SMSF trustee intends ultimately to acquire is a partial interest in that residential property, namely an interest as tenant in common with the other SMSF investor.

| The arrangement fails to meet the test in former paragraphs 67(4A)(a) and (b) of the SISA because the interest ultimately to be acquired as a tenant in common with the other SMSF trustee is not the same interest that is acquired and held on trust by the holding trust trustee.

| The arrangement also fails to meet the requirements of former paragraph 67(4A)(c) of the SISA because the SMSF trustee does not have a right to acquire sole legal ownership of the asset held in the holding trust (whole property) on making one or more payments. Rather, the SMSF trustee has a right, contingent on repayment of the borrowings by both investors, to acquire legal ownership of a partial interest in the property held as tenants in common with the other investor.

| The decision would be the same under section 67A of the SISA for an arrangement entered into on or after 7 July 2010.”

The reason why the above conclusion has been included in this response, is that the clear inference from the ATO ID, is that had each SMSF had its own bare trust arrangement in place (as opposed to there being a “joint” bare trust arrangement for both SMSFs) having an LRBA in relation to a fractional interest in real estate can itself be a “single acquirable asset”.

Nevertheless, a point of difference between the scenario described in the ATO ID and the situation at hand, is that in the ATO ID, each of the two SMSFs was a tenant in common with the other SMSF.

Whereas, in the situation at hand the SMSF is not a tenant in common with another entity. Instead, it effectively has two interests in the real estate, its original unencumbered interest and the interest held under the bare trust as part of a limited recourse borrowing arrangement.

In the Compendium to SMSF2 2012/1, at Item 27, the following issue is raised:

[A link is provided]


| Issue Raised

| 27.Jointly or partly owned assets

| The draft Ruling does not provide an explanation regarding assets that are jointly owned. It does not cover the scenario of a limited recourse borrowing arrangement involving the purchase of a 50% interest in a commercial property from members of an SMSF where the SMSF already holds the other 50% interest in the property.
| Under the limited recourse borrowing arrangement scenario the commercial property, which is on a single title, will be held in a bare trust which has a corporate trustee. On the basis of the Ruling the property would be a single acquirable asset as it is on a single title.

| Can the SMSF transfer all of the property to the bare trust for borrowing? Alternatively, can the bare trust hold the 50% (interest acquired from the members) as it relates to a commercial property which, being on one title, is a single acquirable asset?

| ATO Respnse:

| No change to the Ruling

| This involves a number of issues outside the application of the key concepts dealt with in this Ruling and therefore is not covered.

| The issues raised include:
• whether the arrangement contemplates the entire asset being held on trust under the limited recourse borrowing arrangement; and
• whether a lender has any recourse against the interest in the asset the SMSF already owns.

| The publication Limited recourse borrowing arrangements by self-managed super funds – questions and answers, which is available on the ATO website, addresses the following:

| Is an SMSF trustee allowed to put an existing fund asset into a limited recourse borrowing arrangement?

| No. The money borrowed must be used to acquire a new asset (or replacement asset). This means, for example, that investments under shareholder application or cash extraction arrangements are not allowed.

| The giving of a charge over an existing asset of the fund, as would generally occur under such arrangements, would result in a contravention of the super law.

| If there is a particular arrangement in contemplation specific advice can be sought from the ATO on the facts of that arrangement.

Regrettably the ATO failed to address head on whether there are any single acquirable asset concerns where an SMSF acquires a 50% interest in real estate under an LRBA where it already holds the other 50% interest in the same real estate prior to the LRBA being entered into.

One approach to take here, is that so long as the bare trust arrangement is only in place for a 50% interest in the real estate, that the super fund has:

– Met the requirement of subsection 67A(1)(a) – having applied the borrowing to acquire an interest in a single acquirable asset;

– Met the requirement of subsection 67A(1)(b) – where the acquirable asset (the 50% interest in the real estate) is held on trust such that the super fund trustee has a beneficial interest in the real estate but not the legal title;

– Met the requirement of subsection 67A(1)(c) – where the trustee of the super fund has the ability to acquire the legal ownership of the 50% interest held through the bare trust arrangement once the loan has been paid out.

The ATO’s response to Item 27 as raised in SMSFR 2021/1EC expressly warns against the situation where the SMSF places a charge over an interest it already holds (for example, where 100% of real estate is subject to a charge, but the fund already owned 50% unencumbered prior to acquiring the remaining 50% through an LRBA).

Presumably the situation the ATO is contemplating in Item 27 (as disussed above) can be distinguished from this situation where the holding trust only has legal title to 50% and is only capable of dealing with 50% in the hypothetical event of default and the lender seeks to exercise its rights in relation to the single acquirable asset.

It would be interesting to hear from fund auditors that might take a contrary view.

Thanks once again for the question.


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