Prohibition on borrowing and charging
It is well known that SMSF trustees are generally prohibited from borrowing. One exception to this prohibition is where the borrowing complies with the requirements under s 67A of the Superannuation Industry (Supervision) Act 1993 (Cth), otherwise known as a limited recourse borrowing arrangement (LRBA).
An SMSF trustee is also prohibited from giving a charge over fund assets, unless an exception applies, such as a charge given over an asset acquired under an LRBA.
Offset accounts and redraws
However, the application of these rules to offset accounts or redraw facilities is not entirely clear.
An offset account for a loan is broadly a ‘sub-account’ of a loan where money deposited will notionally be credited to reduce the balance of the loan it relates to while still giving access to the money in the account. Amounts deposited are typically not considered to have been paid towards to the loan itself. These are very common products in the Australian banking and mortgage system.
A redraw facility for a loan allows the borrower to withdraw (or ‘redraw’) any extra payments made towards the loan, over and above the required minimum repayments. A redraw facility does not allow the same access to money paid to an offset account.
To be an LRBA:
- the borrowed money must be applied to the acquisition of (or possibly the maintenance and repair of) the asset; and
- the rights of the lender must be limited to the asset being acquired.
So the question is, does an offset account and a redraw facility (if used) amount to a borrowing or charge?
These concerns arise as:
- the terms of an offset account could result in the lender having a charge over the money deposited in the offset account, which is a charge outside of an LRBA; and
- amounts that are not held in an offset account but held in a redraw facility could amount to a new borrowing, which may contravene the LRBA rules.
ATO webpage QC103937
The ATO recently updated its webpage titled ‘Relationships with the LRBA lender’. This relevantly provides the following:
Offset accounts
A deposit facility offered by an Authorised Deposit-taking Institution (ADI) that is an offset account notionally reduces the loan balance of a mortgage, resulting in a reduction of interest calculated against the loan. Genuine offset accounts offered by an ADI are allowed as it’s not considered a borrowing or charge over the fund’s assets.
Offset accounts offered by non-ADI lenders are not considered bank deposits. Therefore, due diligence should be taken when considering this type of arrangement.
Drawdowns
A drawdown is where an amount of money under the LRBA is released to you, rather than the full amount.
Drawdowns are allowed in certain circumstances. For example, it may be allowable where the:
- additional borrowings are applied in maintaining or repairing the asset held under the LRBA
- drawdowns are provided for under the terms of the original LRBA.
However, they may result in a new borrowing arrangement.
The terms of an LRBA may allow multiple drawdowns. Each drawdown must be reviewed by the trustee to determine whether the borrowing meets the requirements of super law applying to the arrangement.
A contravention occurs if a drawdown doesn’t meet the requirements of super law.
Drawdowns from a credit facility
If your LRBA is with a loan facility or similar arrangement, each drawdown you make will result in a separate borrowing. This is even if there are provisions for redraws arising from earlier repayments.
This commentary is largely in line with what the Commissioner has previously stated regarding redraws. In SMSFR 2009/2 the Commissioner provided the following comment (citations omitted):
- The Commissioner also considers that each drawdown of funds from a loan facility or similar arrangement constitutes a separate borrowing, even if the facility or arrangement makes provision for redraws arising from earlier repayments.
Non-bank lenders
The Commissioner’s view appears to be that offset accounts with Authorised Deposit-taking Institutions (ADIs) are allowable. However, many non-ADI lenders provide LRBAs to SMSFs.
Based on the Commissioner’s statements, an LRBA with a non-ADI that has an offset account should be carefully reviewed before proceeding to ensure the arrangement complies with super law.
Further, and generally, any facility offered should be carefully reviewed to check whether it constitutes an offset account and not a redraw, and otherwise complies with super law, even when provided by an ADI.
Although redraw facilities may be allowable, it is unlikely that each redraw would meet the requirements of an LRBA.
It is important to check whether a non-ADI lender has a charge in respect of the amount in an offset account. The term ‘charge’ is defined in reg 13.11 as follows:
“charge” includes a mortgage, lien or other encumbrance.
A charge can arise under the loan or related documentation and there is no requirement to register a charge for a contravention to occur. In Griffith v Hodge (1979) 2 BPR 9474, the Supreme Court of NSW citing Helsham J in Graham H Roberts v Maurebeth Investments Pty Ltd [1974] 1 NSWLR 93, held that a clause in a building contract provided for a charge on land as a form of security for payment, this clause by itself created a valid equitable charge. Waddell J stated at 9475:
The charge given by [the contract] extends to amounts which might become due in the future. The builder therefore had an interest in the land which he was entitled to protect against the possibility that moneys would become due and owing and enforceable under the charge in the future.
Waddel J also stated at [9476] that the clause enabled the builder to lodge a caveat to protect his interest in the land and this interest would continue until it was finally determined whether or not money is owing by the plaintiffs to the defendants pursuant to the building contract.
Penalties
If there is a charge in relation to an offset account or a redraw facility that contravenes superannuation law significant adverse consequences and penalties may apply.
Thus, a careful review of the lender’s loan and related security documentation should be undertaken to minimise any risk
Conclusions
The use of offset accounts as part of an LRBA can be allowable under super law. Based on the Commissioner’s statements, a ‘genuine’ offset account offered by an ADI will be low risk.
The Commissioner’s comments regarding non-ADI offset accounts suggests that these arrangements should be carefully reviewed to ensure compliance, and advice sought if in any doubt.
Related articles
- Limited recourse borrowing arrangements can use one bare trustee for multiple bare trusts
- SMSF bank accounts and overdraft implications
- What an SMSF should do after paying out an LRBA loan
- Related party LRBA variations and PCG 2016/5
* * *
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Shaun Backhaus ([email protected]), Director, and Daniel Butler ([email protected]), Director.
DBA LAWYERS
13 May 2025
