According to the ATO, with many SMSF trustees entering into limited recourse borrowing arrangements (LRBAs), it appears there is still some uncertainty with respect to associated taxation issues.
SMSFs are generally prohibited from borrowing, but since 2007 there has been an exception where an SMSF borrows on a limited recourse basis to acquire a specific asset, and very strict conditions are met. One of these conditions is that the asset is not held in the name of the SMSF, but is instead held under a separate trust (e.g., a 'holding trust).
A trustee of an SMSF who enters into a LRBA for the purpose of purchasing an asset will be treated as the owner of the asset for income tax purposes, meaning the SMSF will be assessed on the income earned on the underlying asset (such as rental income) and will be able to claim any relevant deductions. In addition, it is the SMSF which should account for any relevant GST amounts on income and expenses associated with the LRBA. Therefore, where the LRBA is set up appropriately, there will be no need for the holding trust to lodge an annual return with the ATO.
The ATO also warns that SMSFs entering into LRBAs need to do so carefully, because an arrangement that does not meet all the requirements would contravene the borrowing prohibition and place the compliance status of the fund at risk.
To gain greater clarity on the tax issues arising from limited recourse borrowing arrangements please call our office: 03 9810 3666.