LRBs & Pension Phase

Can a SMSF engage in limited recourse borrowing while in pension phase?

While there may be good reasons for an SMSF which is in pension phase not to engage in limited recourse borrowing – for instance, if the borrowing arrangement will be cash flow negative – the issue is whether the SIS Act or Regulations prevent a SMSF in pension phase from engaging in a limited recourse borrowing.

It has been suggested that SIS Regulation 1.06(9A)(d) which states that “the capital value of the pension and the income from it cannot be used as a security for a borrowing” prevents a SMSF in pension phase from engaging in limited recourse borrowing.

Our view is that SIS Reg 1.06(9A)(d) is directed to the mischief of a member attempting to charge their pension rights rather than being directed to the trustee (or holding trustee) imposing a charge on the assets of the fund as permitted by s67A.  The expression “capital value of the pension” means, for account pensions, the pension account balance rather than the assets underlying the pension.

Consequently, it seems that this prohibition does not preclude a SMSF from entering into or maintaining a limited recourse borrowing arrangement if one or more members are in pension phase or if one or more members convert to pension phase while the borrowing arrangement is on foot.