Tim Miller, head of technical and education for Smarter SMSF, said section 67 of SIS Act details one of the many investment restriction provisions that prohibit certain behaviours by trustees, but also explains exceptions to those prohibitions.
“It’s very clear cut – superannuation funds cannot borrow with the exception of the limited recourse borrowing arrangements,” Miller said.
“One of the big keys to section 67 is that it’s a prohibition to borrow in one instance, but then what they also do is they add this additional clause in there, which is a prohibition to maintain an existing borrowing and from an audit point of view if the borrowing hasn’t been repaid you are maintaining an existing borrowing, and that is a breach.”
He continued that there are two key areas around LRBAs, the first of which is settlement of investment transactions inside an SMSF.
“There’s a lot of investment investments listed within section 67 and the primary one is the security shares in a company, or units in unit trust. Ultimately, for most SMSFs it is listed position transactions, or the acquisition of shares or units in an investment vehicle,” he said.
“You’ve got seven days. You can borrow up to an amount of 10 per cent of the total value of the fund’s asset, and the period of borrowing is restricted to seven days – not seven business days. It’s quite a specific piece of legislation in that it says that at the time you made the investment decision the fund had the capacity to pay.”
Miller added it is a short-term solution, and he’s very rarely seen it come into fruition with regards to self-managed superannuation funds versus the other borrowing exception, which is more around benefit payments.
Aaron Dunn, CEO of Smarter SMSF, said in regard to the exception with benefit payment, it is ultimately the trustee who has an obligation, either under the law or under the governing rules, to pay a benefit to the members, and to beneficiaries.
“And if they don’t have the capacity to do that, then, once again, we have a capacity to borrow up to 10 per cent of the total assets of the fund, but we have 90 days to repay that amount,” he said.
“If we need to make a benefit payment, we can borrow up to 10 per cent and pay that back within three months. Assuming we’ve got a pension liability, you’re probably not going to have this when you’re talking 10 per cent, but relationship breakdowns, we have an obligation to pay money elsewhere, also with partial payment of a death benefit, something like that might be required.”
Miller gave a practical example where in a fund that had two individual trustees one of the members passed away, and the minimum payment hadn’t been made for that year.
“As a result of one of those individuals passing away, the bank account got frozen, so did the ability to make that pension payment within reasonable time. Fortunately, they actually ended up having two bank accounts running in the fund, but there wasn’t sufficient cash in one of those, so one of them was still operative, and the other one had been frozen,” he said.
“Therefore, to ensure that minimum pension obligation was made available for that year, we needed to put in place a temporary borrowing to allow for that minimum pension obligation to be made, which therefore entitled the funds to gain the ECPI for that year, and ultimately, not only that year, but potentially for the part of the subsequent year.”
He continued that this type of scenario is something that may be seen more often in terms of clients that are aging and “hitting these roadblocks” in respect to death or incapacity.
“It’s a timely reminder to note that you do have that opportunity available, but noting the limitations around the 10 per cent and the timeframe to get that money back is crucial,” he said.
