1. Look through tax treatment for LRBAs - Now Enacted

Look through tax treatment for limited recourse borrowing arrangements (LRBAs) means that most income and capital gains tax consequences associated with the asset, which has been acquired on a geared basis and held by a holding trust, will be borne by the relevant superannuation fund.

The relevant legislative changes introducing the look through treatment received Assent on 16 September 2015 and applies retrospectively from September 2007 for LRBAs – from the date when super funds were first permitted to undertake LRBAs.  These changes mean that any doubt as to the tax treatment of the holding trust are removed.  Essentially, the tax and GST treatment of limited recourse borrowing arrangements will be in line with industry practice – which is to treat all income, capital gains and GST tax issues as occurring at the level of the superannuation fund and that the holding trust is not taxed in its own right, does not lodge tax returns and does not incur GST.

Look through tax treatment means that the superannuation fund (and not the holding trust) will be treated as the owner of the asset (and not the holding trustee) and acts done by the holding trustee in relation to the asset will be treated as if they had been done by the superannuation fund.  

What does this mean?  Essentially, it means that for income tax and capital gains purposes, the holding trust is ignored and the superannuation fund is treated as if it were the owner of the asset.  So when the asset is leased, the superannuation fund will be treated as receiving the lease payments.  Also when the asset is sold, the superannuation fund will be treated as having sold the asset and therefore derived any capital gain or loss and the superannuation fund will have the same cost base and sale proceeds as would have applied to the holding trustee.

If the asset is transferred from the holding trust to the superannuation fund – this transfer will be ignored as the superannuation fund is treated as if it owned the asset.

The look through treatment does not apply for all income and capital gains tax purposes - eg the superannuation fund is not treated as owning the asset for TFN and PAYG purposes.

The look through treatment will also apply for GST purposes - so that the super fund will be treated as making any taxable supply which arises when the property is leased and it is the superannuation fund which will be liable for any GST arising in respect of the leasing of the property.

However the legislative changes do not affect the land tax treatment of limited recourse borrowing arrangements as land tax is a state/territory tax and so federal legislative changes do not apply.  Generally the holding trustee will be treated as the owner of the acquired asset and not the SMSF trustee – but this varies from jurisdiction to jurisdiction.  For example, in NSW both the holding trustee and the SMSF trustee are both assessed on the land with the SMSF trustee obtaining a tax credit in its assessment for any tax paid by the holding trustee in its assessment.