“It is well known that SMSF trustees are generally prohibited from borrowing. One exception to this prohibition is where the borrowing complies with the requirements under s 67A of the Superannuation Industry (Supervision) Act 1993 (Cth), or LRBA,” Backhaus said.

“An SMSF trustee is also prohibited from giving a charge over fund assets, unless an exception applies, such as a charge given over an asset acquired under an LRBA.”

However, he said the application of these rules to offset accounts or redraw facilities was not entirely clear.

“An offset account for a loan is broadly a ‘sub-account’ of a loan where money deposited will notionally be credited to reduce the balance of the loan it relates to while still giving access to the money in the account,” he said.

“Amounts deposited are typically not considered to have been paid towards the loan itself. These are very common products in the Australian banking and mortgage system.”

A redraw facility for a loan allows the borrower to withdraw (or redraw) any extra payments made towards the loan, over and above the required minimum repayments.

However, a redraw facility does not allow the same access to money paid to an offset account.

“To be an LRBA, the borrowed money must be applied to the acquisition of – or possibly the maintenance and repair of – the asset, and the rights of the lender must be limited to the asset being acquired,” Backhaus said.

“So the question is, does an offset account and a redraw facility, if used, amount to a borrowing or charge? Concerns around this arise as the terms of an offset account could result in the lender having a charge over the money deposited in the offset account, which is a charge outside of an LRBA. Furthermore, amounts that are not held in an offset account, but held in a redraw facility, could amount to a new borrowing, which may contravene the LRBA rules.”

Updated ATO guidance, QC103937 Relationships with the LRBA lender, said a deposit facility offered by an ADI that is an offset account “notionally reduces the loan balance of a mortgage, resulting in a reduction of interest calculated against the loan. Genuine offset accounts offered by an ADI are allowed as it's not considered a borrowing or charge over the fund’s assets”.

Offset accounts offered by non-ADI lenders, it said, are not considered bank deposits. Therefore, due diligence should be taken when considering this type of arrangement.

The regulator also makes reference to drawdowns – an amount of money under the LRBA is released to an individual, rather than the full amount – and said they are allowed in certain circumstances such as where the additional borrowings are applied in maintaining or repairing the asset held under the LRBA, or are provided for under the terms of the original LRBA.

It warned, however, they may result in a new borrowing arrangement, and said that the “terms of an LRBA may allow multiple drawdowns. Each drawdown must be reviewed by the trustee to determine whether the borrowing meets the requirements of super law applying to the arrangement” and highlighting that a contravention occurs if a drawdown doesn't meet the requirements of super law.

In relation to a drawdown from a credit facility, the guidance said if an LRBA is with a loan facility or similar arrangement, each drawdown made will result in a separate borrowing, even if there are provisions for redraws arising from earlier repayments.

“This commentary is largely in line with what the commissioner has previously stated regarding redraws,” Backhaus said.

“In SMSFR 2009/2 the commissioner commented ‘the commissioner also considers that each drawdown of funds from a loan facility or similar arrangement constitutes a separate borrowing, even if the facility or arrangement makes provision for redraws arising from earlier repayments’.”

Backhaus said the commissioner’s view appears to be that offset accounts with ADIs are allowable, however, many non-ADI lenders provide LRBAs to SMSFs.

“Based on the commissioner’s statements, an LRBA with a non-ADI that has an offset account should be carefully reviewed before proceeding to ensure the arrangement complies with super law,” he said.

“Further, any facility offered should be carefully reviewed to check whether it constitutes an offset account and not a redraw, and otherwise complies with super law, even when provided by an ADI.”

Although redraw facilities may be allowable, it is unlikely that each redraw would meet the requirements of an LRBA.

“It is important to check whether a non-ADI lender has a charge in respect of the amount in an offset account. The term ‘charge’ is defined in reg 13.11 as ‘charge includes a mortgage, lien or other encumbrance’,” Backhaus said.

“A charge can arise under the loan or related documentation and there is no requirement to register a charge for a contravention to occur. In Griffith v Hodge (1979) 2 BPR 9474, the Supreme Court of NSW citing Helsham J in Graham H Roberts v Maurebeth Investments Pty Ltd [1974] 1 NSWLR 93, held that a clause in a building contract provided for a charge on land as a form of security for payment, this clause by itself created a valid equitable charge.”

The ruling said “the charge given by [the contract] extends to amounts which might become due in the future. The builder therefore had an interest in the land which he was entitled to protect against the possibility that monies would become due and owing and enforceable under the charge in the future”.

“The judgment also stated that the clause enabled the builder to lodge a caveat to protect his interest in the land and this interest would continue until it was finally determined whether or not money is owing by the plaintiffs to the defendants pursuant to the building contract,” Backhaus said.

“If there is a charge in relation to an offset account or a redraw facility that contravenes superannuation law significant adverse consequences and penalties may apply, therefore a careful review of the lender’s loan and related security documentation should be undertaken to minimise any risk.”