The first issue that must be addressed is whether the loan is with an institution or an individual.

“For example, is Westpac accepting that their only recourse to the borrower is the property, and everything else would be there? But you don't know that it's a limited recourse loan,” Johnson said.

“Let's have a look at the rules for a limited recourse borrowing arrangement. The trustee of an SMSF, a regulated super fund (RFS), is not prohibited from borrowing or maintaining a borrowing to acquire a single acquirable asset, provided that the asset is held on trust, the lender's rights are limited to the assets, and the RSF trustee has the right to acquire the asset after making one or more payments.”

An auditor could conduct a title search to see if the property is in the bare trustee’s name to determine if the RFS trustee has the right to acquire the asset and that it is held in trust.

“You can tell that it's a single acquirable asset, but are the rights of the lender or any other person limited to the asset? You can't tell that without a loan agreement.”

“If it is a commercial lender, and the loan is in the name of the super fund and the property is in the name of the bare trustee, you would be reasonably confident that it would be a proper LRBA, because the banks only do it correctly.”

If this is the case, the auditor may then decide not to raise an auditor contravention report but require that a copy of the loan agreement be submitted as soon as possible.

“However, if it is a second-tier lender, or it's a related party or someone else, no way could you accept it, because there's no way you would know that the loan is limited recourse,” he said.

“And this is the big problem you get with clients, because they want to borrow off a related party, and believe they can borrow unsecured to buy an asset all over the place. So, why can't they make this kind of commercial arrangement?

“Nobody lends unsecured on a limited recourse basis. You can't walk down to a commercial lender and ask to borrow $20,000 to buy a car unsecured. They'll go, ‘yeah, we'll lend you $20,000 unsecured, but you're responsible for the money. We can take any asset of yours that we want if you don't pay it back', whereas it's not the case in a limited recourse borrowing arrangement.”