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Interesting facts about SMSF limited recourse borrowing arrangements
The ability to borrow using an SMSF is growing in popularity to build for retirement.
As a specialist SMSF business, SMSF360 has a strong understanding of the super and tax laws to assist you in establishing and maintaining the limited recourse borrowing arrangement. This includes:
Subject to how long your fund has been in existence, any limited recourse borrowing arrangement that is being entered into must have a trust deed that complies with the rules post 7 July 2010. Any operative trust deed before this date will require an upgrade to allow for the fund to acquire an asset using a borrowing arrangement.
Different rules apply to each state when it comes to the purchase of property using a limited recourse borrowing arrangement. Whilst in Victoria, you have the ability to exercise a nomination subsequent to purchase (i.e. by signing ‘and/or nominee’), these rules don’t apply in other jurisdictions. As best practice, it is recommended that the bare trustee company be established prior to any decision to purchase to ensure that the contract is signed in the name of the title holder.
Each financial institution that provides SMSF lending have different banking policies. It is important that you understand these nuances and processes by the lender to ensure as relatively seamless process to facilitate the loan and settle on the property. For related party borrowings, you need to consider what terms and conditions of the loan will apply, including interest rate, repayment schedule and taking appropriate security to ensure that the transaction is at arms’ length.
When signing a contract to purchase within a SMSF, it is recommended to provide at least 60 day (more likely 90 days) for settlement. An SMSF loan is not like a typical investment loan – whilst it requires the bank to look at servicing and security, it will also require the bank’s legal team to peruse the fund’s trust deed and bare trust to ensure compliance with the super laws. Where the fund is new, allowing time to rollover monies into the SMSF will also add to the time frame required to settle on a property acquisition.
When acquiring an asset using a limited recourse borrowing arrangement, the title is held by the custodial (bare) trustee on behalf of the SMSF. The fund trustee is not the title holder to the asset, it only holds a beneficial interest in the asset until such a time that the loan has been fully repaid and the mortgage discharged. The only other activity involving the bare trustee is that as title holder to the asset, it will also act as lessor when signing a contract for property to be let to a tenant.
Whilst the bare trustee is the title holder to the asset, all the activity relating to the collection of income and payment of expenses happens within the SMSF. The bare trust is not required to have ATO registrations completed, nor establish a cash account as all activities occur within the SMSF as the beneficial owner of the asset acquired using a limited recourse borrowing.
Whilst the borrowing is in place, there are strict rules around what you can and can’t do with the acquired asset. Many of these rules are outlined within SMSFR 2012/1, which considers:
- What is a single acquirable asset?
- Repairing and maintaining the acquired asset versus improving the asset
- When the asset becomes a different asset
You can contact us at SMSF360 to discuss many of the key concepts and technical elements of SMSF limited recourse borrowing arrangements.
When the loan has been repaid you have the ability to transfer the asset from the bare trust across to the SMSF as the beneficial owner. Super laws do not require this to occur in all instances, so it may be more economical to retain the asset in the bare trust if you do not intend to change the character of the asset (e.g. develop or rezone the property).
|Bank loan||Related Party loan|
|Bare Trustee Company|
Fee for preparation of custodial trustee company for the Bare/Holding Trust
Fee for preparation of bare/holding trust documentation to facilitate the acquired asset using a limited recourse borrowing arrangement
SMSF360 will review an existing trust deed to ensure it allows for a fund to enter into an LRBA. Where a trust deed upgrade is required a fee of $440 (inc. GST) is payable.