28/10/2010

The ATO has recently issued five Interpretative Decisions dealing with limited recourse borrowing.

Re-financing of existing loans

ATO ID 2010/169 deals with the question whether a borrowing entered before 7 July 2010 (the date from which the new limited recourse borrowing provisions apply) can be refinanced. 

The answer is “Yes” provided certain conditions are satisfied.

The refinancing is permitted provided:

• the money borrowed under the refinancing loan is applied solely for the purpose of paying out the amount due under the original loan;
• the refinancing loan satisfies the requirements of the limited recourse borrowing provisions; and
• legal title to the asset which was acquired remains with the trustee of the holding trustee (aka bare trustee, custodian etc).

The same answer would apply if the loan to be refinanced was made on or after 7 July 2010 (ie the arrangement is one to which s67A of the SIS Act applies as against s67(4A)).

Third party guarantees

ATO ID 2010/170 deals with the situation whether a member (or other related party) can provide a guarantee to the lender in respect of a limited borrowing arrangement to which s67(4A) applies.

The answer is “Yes”. 

Section 67(4A) required that the rights of the lender be limited to the asset which was acquired with the loan.  The section did not deal with the rights of other parties in relation to the acquired asset.  The current provision, section 67A, does now require the rights of the lender and any other person to be limited to the acquired asset.

Under s67(4A) if the guarantee was invoked then the guarantor’s rights against the SMSF trustee were not limited.  Now, such rights must be limited.

If a lender requires a guarantee from a member or other related party, the lender will usually require their standard third party guarantee form to be signed.  Now, because of the wording of s67A, the lender must also provide an additional guarantor waiver form.

Joint Investments

ATO ID 2010/172 deals with the issue of whether an arrangement by which two SMSFs jointly borrowed to acquire an asset which was held in a single holding trust satisfies the limited recourse borrowing exception?

The answer is “No”.

The structure of the arrangement involved one borrowing. Title to the acquired asset was held by the trustee of the Holding Trust and each SMSF acquired an interest in the property as a tenant in common.

The key reason why this structure did not satisfy s67(4A) is that the title held by the trustee of the Holding Trust does not match the title which the SMSF will acquire when the borrowing is repaid.

Had the structure been two loans and two Holding Trusts, then the outcome would be different.  In a two loan/two Holding Trusts structure, the title the Holding Trustee holds is a partial interest in the property as tenant in common.  The title which the SMSF will acquire on paying out the loan is partial interest as a tenant in common.

Additionally, the lender should take out two mortgages; one in respect of each loan and the mortgage should be restricted to the interest the SMSF has in the acquired property.

Great care must be taken to correctly structure a joint investment structure and relevant professional advice should first be obtained.

Capitalisation of interest

ATO ID 2010/184 deals with the issue of whether interest on a limited recourse borrowing can be capitalised without breaching section 67(1).

The answer is a surprising “Yes”.

This answer while welcome is somewhat surprising given comments in SMSFR 2009/2 that a drawdown on a loan facility would be treated as a new loan.  If the drawdown is a new loan, how has the acquisition element been satisfied in respect of the new loan?

The ID states that “the Commissioner accepts that the drawdown representing the capitalisation of interest is for the purpose of acquiring the asset under the limited recourse borrowing arrangement.  That is, the requirement in former paragraph 67(4A)(a) of the SIS Act is met in respect of the drawdown if the amount capitalised is a cost related solely to the original borrowing under an arrangement which otherwise meets the requirements of the former paragraphs 67(4A)(a) to (e) of the SIS Act.”

While the ID is concerned with the previous wording of the limited borrowing exception, the reasoning of the ID would apply to the current wording found in s67A.

Charges for third parties

ATO ID 2010/185 deals with the issue whether the trustee of the Holding Trustee can, consistently with the requirements of 67A, grant a charge over the asset held in the Holding Trust for an entity other than the lender.

The answer is “No”.

If the trustee of the Holding Trust were to grant a charge over the asset held in the holding of for say, the parent company of the lender, then that charge would cause the arrangement to fall outside s67A.

If you have any questions in regard to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.