Care needed over SMSF borrowing refinancing

Application of two rules

By Darin Tyson-Chan
Thu 26 Aug 2010

Refinancing of limited recourse borrowings within SMSFs needs to be carried out carefully.

Self-managed superannuation fund (SMSF) advisers and trustees need to be wary of the two sets of rules that apply to limited recourse borrowing arrangements when looking to refinance existing gearing arrangements, according to a technical services expert servicing the sector.

Recent changes to borrowing rules in the Superannuation Industry Supervision (SIS) Act mean gearing arrangements put in place within an SMSF before 7 July 2010 are governed by section 67(4A) of the act, while gearing arrangements put in place after 6 July 2010 are governed by sections 67A and 67B of the act.

As part of these legislative changes, it was confirmed SMSF trustees can refinance an existing limited recourse borrowing.

"But that comes with a warning. If you refinance an arrangement that was in place pre 7 July it then becomes a new arrangement," Cavendish Superannuation head of technical services Tim Miller said.

"That means it will then fit under the new legislation and will become a section 67A limited recourse borrowing arrangement and that could potentially create issues," he said.

Miller cited situations where an instalment warrant had been originally set up to purchase a bundle of different shares as having the ability to cause problems if the borrowing was now to be refinanced.

Under the amended legislation, limited recourse borrowing arrangements can only be put in place to acquire a single asset or a collection of identical assets.

As such, a refinancing transaction for a bundle of different shares would potentially see an SMSF breach the SIS Act and in turn be considered non-complying.

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