SMSF – Prohibition on charges

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A fundamental operating standard of self-managed superannuation funds (SMSFs) is the prohibition on giving a charge over or in relation to any SMSF asset.

Charges

A charge is an agreement or mortgage over an asset that is used to secure the repayment of a loan. A “fixed and floating charge”, for instance will change in value according to the value of the asset. It will “freeze” on default and the creditor is permitted to exercise rights over the asset.

The purpose of the prohibition on charges over or in relation to SMSF assets is to ensure that SMSF trustees do not put SMSF assets at risk of creditors.

Exception – pre-existing charges

There is, however, a distinction made by the ATO between the SMSF trustee actually creating a charge over an SMSF asset, and the SMSF merely recognising the existence of a pre-existing charge over an asset that it acquires. If this distinction did not exist, an SMSF would never be able to acquire assets over which a charge existed.

The ATO states that, although an SMSF is under law prohibited from “recognising, encouraging or sanctioning” a charge over a member’s benefits, this was never intended to cover merely acquiring an already-charged asset.

Example: SMSF acquiring a charged asset

M and N are trustees of an SMSF. They become aware of a property located in Berrima NSW which they believe to be an ideal investment for their SMSF. The Berrima property is owned by someone unrelated to M and N.

M and N, acting as trustees for the SMSF, acquire the property. They do so in the full knowledge that the property is already subject to a charge in favour of another unrelated party. The land will, moreover, remain subject to the charge after the SMSF acquires it, and the charge will be binding upon the SMSF.

In this situation, M and N did not breach the prohibition on charges in the SMSF regulations. They did not “give a charge”, but merely acquired an asset that is subject to a pre-existing charge.

Conclusion

If you have any issues regarding charges over SMSF assets, call LAC Lawyers and we can provide advice and assistance.

 

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