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SMSF Borrowing – important changes effective 7 July 2010

The changes are made by the Superannuation Industry (Supervision) Amendment Act 2010.

The highlights of the changes to the law are:

  • the name for SMSF borrowing arrangements has changed from “Instalment Warrant Borrowing arrangements” to “Limited Recourse Borrowing arrangements”;
  • the SMSF can use the borrowed money to meet expenses that are intrinsically linked to the purchase of the asset, for example: conveyancing fees, stamp duty, brokerage or loan establishment costs. Previously, it was uncertain whether the money could be used for those expenses;
  • the concept of ‘single acquirable asset’ has been clarified, and narrowed, in relation to shares etc.; and
  • the SMSF can refinance its borrowing.

The new law will not apply retrospectively to existing arrangements. However, it will apply to any existing arrangements if those arrangements:

  • are refinanced; or
  • are varied to the extent that the original borrowing arrangement has effectively been rescinded or replaced for example by a change of terms and conditions in the lending.

The new rules also add some new restrictions:

  • the rights of any person (not just the lender’s) against the super trustee in relation to a super borrowing arrangement are limited to rights relating to the original asset purchased; and
  • the only security which can be given or held over the original asset by the lender must be one which is associated with the direct borrowing arrangement.

Personal guarantees

Several providers of limited recourse borrowing arrangements are requiring trustees, or third parties such as fund members, to provide guarantees of the borrowing to underwrite the lender’s risk from the limited recourse nature of SMSF borrowing arrangements.

The law does not prevent a lender exercising rights under a guarantee given by a third party, since the lender’s rights under such guarantees are not rights against the trustee of the fund. Accordingly, the lender has rights against the guarantor’s assets if there is a default on the borrowing.

The guarantor subsequently has a common law right to recover losses (which may exceed the value of the asset which was the subject of the borrowing) from the principal debtor – the trustee – and the trustee may then arguably seek indemnity out of the fund’s assets.

It has been unclear, where a guarantee was given by a trustee in its personal capacity, whether a lender’s entitlement to recourse against the trustee’s personal assets may lead to the trustee claiming indemnity out of the fund’s assets.

The requirement that the acquired asset must be held in trust remains. The trust structure is a feature of traditional instalment warrants and helps to quarantine the other assets of the superannuation fund from the investment risk that the limited recourse borrowing arrangement represents.

The amended law seeks to protect fund assets from such claims by limiting the rights of the lender or any other person, such as a guarantor, against the super fund trustee in connection with or as a result of a default on borrowing, to rights relating to the acquired asset only.

In this way, a guarantor’s rights against the super fund trustee are limited as the rights of the lender are limited, so that no claim against the super fund trustee should arise which could give rise to a claim for indemnity from fund assets.

Furthermore, the amended law ensures that the acquired asset cannot be subject to any other charge than that associated with the direct borrowing arrangement. With the exception of the asset that is the subject of the borrowing arrangement, the assets of the superannuation fund cannot be given as security for a borrowing without breaching the Superannuation Industry (Supervision) Regulations 1994.

Should you require any further information in relation to this issue, please do not hesitate to contact our Property and Commercial Department Manager, Holly Gilholme on 07 5506 8202 or email

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Attwood Marshall Lawyers
Northern NSW, Gold Coast, Coolangatta | Robina | Brisbane | Kingscliff

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Barry van Heerden

Barry van Heerden

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  • Property and Commercial
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