Tax status of SMSF borrowing arrangements clarified

The Government has clarified the tax treatment of borrowing arrangements, such as limited recourse borrowing by self-managed superannuation funds and instalment warrants that use interposed trusts to hold geared assets. The clarification confirms the long-standing industry practice of ignoring the trust and treating the investor or SMSF trustee as the owner of the asset.

After issuing a draft amendment for comment earlier this year, the Government has tabled Tax and Superannuation Laws Amendment (2015 Measures No. 2) Bill 2015, which provides "look-through" income tax treatment for instalment warrants and limited recourse borrowing arrangements.

Recognising that instalment warrants, LRBAs and other types of gearing arrangements have become more complex over time, the amendment is designed to remove any uncertainty about how the law applies.

Under these arrangements, the asset is held in trust during the life of the loan to provide security for the lender, while the economic benefits (such as dividend income) flow through to the investor.

Superannuation legislation actually requires super funds to use a separate trust when entering into a borrowing arrangement.

The amendment makes it clear that anything that happens to or results from being the owner of the asset, such as receiving dividends and franking credits, affects the investor or SMSF trustee and not the interposed trust.

One complication for super funds arising from the trust rule is that the fund may be liable to pay capital gains tax when the final instalment is paid. The amendment removes this disadvantage.