The document summarizes proposed changes to limited recourse borrowing arrangements for self-managed superannuation funds in Australia. Key points include: - Sections 67A and 67B were introduced to the Superannuation Industry Supervision Act to replace section 67(4A) and explicitly define limited recourse borrowing arrangements. - Under the new law, borrowing must be for a single acquirable asset or collection of identical assets, limiting rights of recourse to just the acquirable asset(s). - Personal guarantees are allowed but rights of the lender are still limited to the acquirable asset(s), protecting other fund assets. - The new law allows for refinancing and replacement

1. Changes affecting
Limited Recourse
Borrowing Arrangements
Aaron Dunn
B.Bus (Acc), CPA, SSA
SMSF Specialist AdviserTM
20 July 2010

2. Today’s Session
• Where we’ve come from...
• Proposed changes to Corporations Law
• Limited Recourse Borrowing Arrangements
– Section 67A & 67B
– Comparison of changes
• Questions

3. History of Limited Recourse Borrowing
June 2009
26 May 2010
Issuing of TR2009/D3 –
Superannuation
super contributions.
Industry (Supervision)
4 April 2008 SMSF instalment
Amendment Bill 2010
ATO release taxpayer warrant examples
introduced into
alert, TA2008/5 and provided with use of
Parliament to make
Q&A document on personal guarantees,
changes to limited
Instalment Warrants & contradictory to
recourse borrowing
Super Funds. TA2008/5. Finalised as 7 July 2010
arrangements
Significant uncertainty TR2010/1 on Law takes
(instalment warrants)
still remained 25/02/2010. effect
10 March 2010 6 July 2010 17 July 2010
9 June 2010
24 September 2007 Assistant Treasurer, Senator Nick Received Election
Exposure draft
Introduction of section Sherry announces changes to tax Royal Assent called,
of
67(4A) to SIS Act, to law and consultation on proposed
Corporations
allow for instalment amendments to Instalment reviews,
Amendment
warrants to operate Warrant arrangements reforms and
Regulations
and not breach the Bills now on
2010
borrowing provisions. Minister Bowen also announced hold (maybe
changes to licensing permanently)
requirements

4. Proposed changes to Corporations Law
• Exposure Draft – Corporations Amendment
Regulations 2010
• Proposed amendments intend to:
– Make limited recourse borrowing arrangements financial
products
– Ensure limited recourse borrowing arrangements are not a
credit facility when acquired by the Fund; and
– An AFSL covering derivatives is taken to also cover limited
recourse borrowing arrangements

5. Proposed changes to Corporations Law
• Draft Regulations released 9 June 2010. Submissions were
able to be made up to 28 June 2010
• Issues/Concerns:
– No distinction between ‘traditional’ instalment warrants and limited recourse
loans (e.g. Property transaction). Are property based arrangements really
sophisticated?
– Issue on broad terminology of an ‘arrangement’ in accordance with section
67(4A) (will now be s.67A).
• When is it a financial product? Could there be more than one product issued (i.e. When
property is purchased b/w buyer & agent, then again when bank agrees to loan?)
• Who is responsible for issuing the PDS?
– What authorisation is required for those who do not hold a derivatives
licence?
• Do you create a ‘carve-out’ for limited recourse borrowing arrangements?
• Many derivatives licence holders would have little or no understanding of superannuation law
requirements

6. Superannuation law
changes to Limited
Recourse Borrowing
Arrangements

7. The new arrangements
• Royal Assent received 6 July 2010
• Effective 7 July 2010
• Repealed section 67(4A)
• Introduced section 67A & 67B
• New terminology
– Limited Recourse Borrowing Arrangements
• no longer defined as Instalment Warrants within the Act

8. The definition hasn’t changed
• The borrowings must be for the acquisition of an
asset
• The asset must be held on trust
• The acquired asset is the only asset that the lender
has recourse against in the event of default (limited
recourse borrowing)
• When the borrowing is fully repaid, the asset must
transfer to the SMSF
– Can become an IHA issue where no transferred
There is no revamp of the requirements from s.67(4A)
i.e. these preconditions must still all exist

9. How it works

10. Summary of changes
Section 67A & 67B (New Law) Section 67(4A) – (Old Law)
Explicitly defines the interpretation of acquirable asset While the Act refers to ‘asset’ in the singular, it is
in the singular possible to interpret asset in the plural
Ensures that the recourse of the lender or any other The SIS Act limits the rights over the original asset in
person against the super fund trustee for default on terms of the direct lender and associated borrowings.
the borrowing is limited to rights relating to the
acquirable asset.
Limits borrowing arrangements to a single asset or a Allows borrowing arrangements over multiple assets
collection of identical assets treated together as a which may permit the lender to choose which assets
single asset. are sold in the event of a default on the loan.
Clearly defines circumstances under which assets can Allows arrangements where the asset subject to the
be replaced borrowing can be replaced at the discretion of the
trustee or the lender

11. ‘Acquirable’ Asset
• Defined as a ‘single asset’ or a ‘collection of identical
assets’
– Replaces concept of “original asset” within s.67(4A)
• EM defines single acquirable asset to include:
– A parcel of identical shares in a single company or units in
a unit trust that have the same market value. For example,
#10,000 BHP shares.
• Note - any collection of assets must be bought and sold as a
collection; there can be no partial sell-down, DRP, etc.
– The land and house/building for any real property
acquisition.
• Furnishings/Non-fixtures not included. Would require separate
borrowing.

12. Personal Guarantees
• The use of personal guarantees are allowed, however
the rights of the lender and any other person against
the Fund Trustee are limited to the acquirable asset
– Protection against claim on other fund assets
• Unlikely for “shortfalls” to count as contributions
– Where trustee/member is guarantor in personal capacity –
appears shortfall paid personally does not count as a
contribution, as SMSF has right to ‘walk away’ under
limited recourse arrangement.
• This leaves the guarantor totally exposed!!

13. Refinancing
• Ability to now refinance existing loans
– Allows for a Fund with cash flow problems to
minimise risk of default
• Associated expenses can be included as part of
borrowing
– E.g. Stamp duty, conveyancing, brokerage, loan
establishment costs
• A re-negotiation of a borrowing with the same
lender with no changes in conditions can occur is
not a refinance

14. Replacement Asset
• Section 67B, including comprehensive list of ‘what
qualifies’
• Examples of what does not qualify:
– sold BHP shares and buy CBA shares (as part of change to
investment strategy)
– Property improvements (development)
– Property subdivision
• What is a repair versus what is a capital improvement?
– Can use borrowings to maintain or repair to ensure it is
‘functional’ (but not improve)
– Get it wrong and it will risk the complying status of the
fund

15. Important Dates
Pre 24/09/2007 Section 67(4A) – SIS Act Section 67A & 67B – SIS Act
(to 6 July 2010) (from 7 July 2010)
Three distinct dates for borrowing requirements
contained within section 67 of the SIS Act

16. Where to from here?
• Certainty that limited recourse borrowing is here
to stay...
– Cooper Review recommended review in 2 years time
• SMSF arrangements will become almost
exclusively in property
– Very costly to run equities and managed funds directly
– Use product provider
• Wait and see on details about financial product &
derivative requirements
• ATO updated Q&A on limited recourse borrowing
arrangements

17. Thank-you