Author: Robin Sun
Limited Recourse Borrowing Arrangements (LRBAs) were previously referred to as installment warrant arrangements. The acquisition of an installment warrant asset is achieved through a mortgage taken out on the asset, but in the event the trustee defaults on the loan, the legal recourse available to the lender is limited to taking possession of that asset for recovery of the outstanding amount. The right specifically excludes placing at risk any other assets held by the trustee on behalf of the superannuation fund, ie the lender is unable to target any other assets of the super fund. Installment warrants may only be taken over new eligible assets. Interest may not be capitalized.
The asset must be held in a trust. A warrant trust is typically a third party holding the warrant assets on behalf of the fund trustee. The Tax Office has indicated that a unit trust is not an appropriate vehicle to be used for purposes of a warrant trust. The SMSF trustee has the right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest. Any loan repayments, income received, interest paid, etc. are directly processed in the SMSF, as if the asset was owned by the SMSF.
Personal guarantees are permitted using third party or non-superannuation assets by members or related parties but such guarantees are expressly prevented from increasing the assets of the fund. Where, as a result of a default by fund, the member providing a personal guarantee makes up the shortfall and the asset is transferred to the fund, the shortfall amount recovered by the guarantee is a contribution for contribution cap purposes.
Sources: DIY Super & ATO Website