The ability to utilise borrowings to repair and maintain an asset as part of an SMSF limited recourse borrowing arrangement (LRBA) has been a key feature of the revised legislation since 7 July 2010, when section 67A & 67B were introduced. However, being able to redraw on a loan facility to make such repairs is subject to the original loan terms specifically providing for redraws or additional borrowings.
This issue was recently posed at the December 2012 ATO NTLG Super Technical sub-committee, which discussed a range of scenarios regarding loan drawings to undertake repairs to an asset acquired using a LRBA.
Consider some of the following views expressed at this meeting:
- Where the original loan specifies for redraws and additional borrowings under the one loan agreement and additional borrowings are made under those terms, then any subsequent drawdowns would be allowable where they satisfy the requirements of s67A. This is confirmed within paragraph 28 of SMSFR 2012/1;
- Where the original loan and borrowing trust documentation is silent on additional drawings but the bank is happy to provide that facility several years after the establishment of the arrangement, it is the Commissioner’s view that a drawdown to fund such repairs cannot be provided. This is because additional borrowings were not provided for under the original terms and conditions of the LRBA entered into, and they do not constitute a borrowing of money (SMSFR 2009/2) “under an arrangement under which the money is or has been applied for the acquisition of a single acquirable asset, including … in maintaining or repairing the acquirable asset.”
- Where the original loan was silent on additional borrowings, and as a result of a refinance the trustee is able to not only replace the original borrowings but also obtain further borrowings for repairs, this is allowable to the extent that the new borrowing is no more than the sum of:
- the amount needed to repay the existing borrowing,
- expenses incurred in connection with the new borrowing, and
- expenses incurred in maintaining or repairing (but not improving) the acquirable asset, and
- the amount of the new borrowing is applied to those things and only those things.
It is therefore paramount that any subsequent drawdowns of a loan be allowable under the original loan agreement to ensure compliance with the Regulator’s views expressed within SMSFR 2012/1. With an increased focus on correct structuring of SMSF borrowing arrangements, failure to adhere to these requirements could have disastrous consequences.