Limited recourse borrowing and the ATO

The ATO released an Interpretative Decision last Friday addressing one aspect of a limited recourse borrowing arrangement - that is whether an SMSF trustee contravenes section 109 SIS if it borrows money from a related party under a limited recourse borrowing arrangement on terms favourable to the SMSF.

Correctly, the ATO concluded that this does not breach section 109.

What the ID doesn't say is whether this creates any other issues for the arrangement. Yesterday, Money Management posted an article (ATO SMSF decision queried Money Management) suggesting that the ATO had given the "green light" to SMSFs borrowing from related parties on beneficial terms. And an article in today's AFR has a similar flavour.

Comments made both within those articles and in response to them suggest on the one hand that caution should be exercised, but on the other hand that there are wider opportunities to be exploited.

I would suggest a more cautious approach be adopted. The ID had a very limited scope - the application of section 109. It makes no comment about other issues including:

• whether the discount to the arm's length rate of interest enjoyed by the superannuation fund is a contribution?


• whether the arrangement gives rise to non-arm's length income to the SMSF

I expressed concern in an earlier post about the Cooper Review recommendation of a general review of superannuation borrowing in 2 years' time. It seems to me that when comments begin to surface pushing the interpretation of announcements far beyond the limits clearly intended, the industry runs the risk of losing the concessions that for the most part are not abused.