Limited Recourse Borrowing Arrangements / Professionals / SMSF / SMSF Compliance

Replacing assets using limited recourse borrowings affected by natural disasters

The ATO will exercise its discretion to allow for disaster-affected properties within SMSFs using borrowings to be replaced

It was pleasing to read recently in Investor Daily recently (23 March 2011) the Australian Taxation Office saying that it will use its discretionary powers to provide relief for SMSF trustees with limited recourse borrowing arrangements affected by the recent spate of natural disasters.

According to the article, the Tax Commissioner, Michael D’Ascenzo will use powers provided to him under the Superannuation Industry (Supervision) Act (SIS Act) to allow SMSF trustees to use limited recourse borrowings to repair the fund asset damaged by the disaster in question.

In many instances the type of repairs that are needed would normally be classified as an improvement to the asset or even a replacement asset.  As a result, the rebuilding of assets would be a breach of the requirements contained within section 67B of the SIS Act.

However, the Commissioner has indicated that he was willing to disregard breaches of the replacement asset rules contained within section 67B due to the extraordinary circumstances faced by some individuals.

“In financing repairs or incurring other costs, trustees may need to borrow funds and if trustees contravene the limited recourse borrowing provisions due to the natural disasters experienced Australia-wide, we would be favourably inclined to exercise the commissioner’s discretion under section 42A(5) of the Superannuation Industry (Supervision) Act 1993 to continue to treat the super fund as complying,” D’Ascenzo said.

“We are currently reviewing this matter with APRA (Australian Prudential Regulation Authority) and Treasury to ensure no unintended consequences arise.”

Whilst this is a logical and positive result for SMSF trustees affected by these natural disasters, it appears illogical as to why the replacement rules remain so restrictive to disallow somebody to replace a property that may have been burnt down in a fire?

Whilst discretion isn’t granted lightly by the Commissioner, I believe it does open the door ajar slightly for SMSF trustees to be able to ask for discretion to be applied in the future.

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