SMSF borrowing – Government releases draft legislation to clarify ‘look through’ tax treatment

The correct tax treatment of income from assets held by the trustee of a trust for an SMSF under a limited recourse borrowing arrangement (LRBA) has been unclear. Some years ago the Government announced it would introduce legislation to provide a ‘look through’ approach for income tax purposes, and the draft legislation was finally released in January 2015 (Tax and Superannuation Laws Amendment (2015 Measures No. 2) Bill 2015: Instalment warrants).

The draft legislation provides that, for income tax purposes, an asset is treated as being the superannuation fund’s asset, and not an asset of the LRBA trust. This means the LRBA trust is ignored for income tax purposes and all assessable income (including capital gains) is included in the tax return for the SMSF.

The proposed rules apply to bare trusts set up for SMSF borrowing as well as some other arrangements, and clarify the position that has been largely taken in the industry.

The legislation also specifically provides that the original limited recourse borrowing arrangements established under the now repealed section 67(4A) are to be taxed in the same way.

If you are looking to rely on the ‘look through’ provisions, you must ensure that your LRBA complies with the Superannuation Industry (Supervision) Act.

The proposed legislation is a step forward; however it fails to deal with the treatment for GST purposes, which is a major area of concern in a number of LRBA transactions. Unless this is appropriately dealt with in the final legislation, extreme care must be taken to ensure that GST is dealt with properly in an LRBA. In particular, our concern is that GSTR 2008/3 is not wide enough to apply to all LRBAs.

Please contact a member of our tax and superannuation team if you would like to discuss this further.