By Monica Rule

Self Managed Superannuation Funds (SMSFs) have been able to borrow money to acquire properties since 2007. Back then, it was done via a Superannuation Law provision referred to as “Instalment Warrants”. Then, in 2010, the Instalment Warrants provision was changed with new restrictions and referred to as “Limited Recourse Borrowing Arrangements” (LRBA). 

Under the LRBA provision, borrowing is done on a limited recourse basis. This means the lender’s rights, on any default of the loan, are limited to the property acquired under the LRBA. The SMSF’s other assets cannot be used as security on the loan. Another entity, referred to as a Holding or Bare Trust, holds the property for the SMSF as the legal owner while the SMSF is the beneficial owner of the property.

The LRBA law protects other assets of the SMSF in the event of a default by the SMSF on the borrowings. It is done by quarantining the borrowing to a single acquirable asset (i.e. the property) held by the Bare Trust.

The trustee of the Bare Trust can be anyone as long as it is not the same as the trustee for the SMSF.

The lender can be anyone, even a member of the SMSF, as long as the terms and conditions of the loan are conducted at arm’s length.

If SMSF members are considering lending money to their SMSF to acquire a property, it is important they familiarise themselves with ATO publications: ATO Interpretative Decision 2010/162 (ATOID 2010/162), Practice Compliance Guidelines 2016/5 (PCG 2016/5) and Taxation Determination 2016/6 (TD 2016/6).

Under a LRBA, each Bare Trust can only hold a “single acquirable asset”. The word “acquirable” is important as it restricts what an SMSF can purchase from a member or other related party. If an SMSF is acquiring real estate owned by a member of an SMSF, then it can only be a property that satisfies the definition of a “business real property” under the Superannuation Law. A business real property is any property (i.e. residential or commercial) that is wholly and exclusively used in business. It does not need to be an SMSF member’s business; it can be used in anyone’s business.

A “single asset” means one property on one title. If the property is spread over more than one title, then as long as there is a physical or legal reason why the titles cannot be sold separately, it can be treated as a single asset. For example, a permanent fixture attached to a property which cannot be easily removed and is significant in value relative to the value of the property. Or if under a law of a State or Territory where two properties must be dealt with together, then it can be treated as a single asset (e.g. an apartment with a car park space sold together).

SMSF members who are purchasing a farm or car yard businesses need to be careful as these properties are often spread over multiple titles. So, if there are no restrictions for the titles to be sold separately, then it is not treated as a single asset. If it is treated as multiple assets, then multiple Bare Trusts will be required.

Under a LRBA, SMSF members need to ensure that all money to purchase the property is paid from the SMSF’s bank account and/or the lender. If members pay any of the deposit on the property, then the SMSF will incur double or triple the stamp duty when the property is eventually transferred from the Bare Trustee to the SMSF Trustee once the loan is fully repaid. This is because, when the Bare Trust’s trust deed is lodged for stamping, the SMSF will need to provide the loan document and the SMSF’s bank statement to show that the deposit and any other money to acquire the property was paid by the SMSF and/or the lender.

More than one person can invest in the same property with an SMSF as tenants-in-common. However, you cannot have more than one investor for the one LRBA. The loan needs to be on the percentage of the property acquired by the SMSF and the Bare Trustee must also be the legal owner of the same percentage. Therefore, if there is more than one investor, each investor needs to have their own LRBA for the portion of their share of the property.

SMSF members need to ensure that all documentation concerning the LRBA is correctly worded. The legal title to the property must be in the name of the Bare Trustee and not the SMSF Trustee. The loan contract must be between the SMSF Trustee and the lender (e.g. if it is a related party loan it would be the SMSF member). 

Members also need to check the Stamp Duty laws in each state to ensure all documents are executed in the correct order. Some states such as New South Wales, Tasmania and the ACT require the purchase contract to be executed prior to the Holding Trust Deed; whereas in Victoria and Western Australia it can be done in any order. I believe in South Australia, Queensland and the Northern Territory, the Bare Trust Deed needs to be executed before the purchase contract is signed.

Please check with your Stamp Duty experts prior to entering into a LRBA. If the documents are incorrectly worded or done in an incorrect order, the SMSF may not only end up paying extra stamp duty but will also end up paying capital gains tax upon the transfer of the property from the Bare Trustee to the SMSF Trustee. If everything is done correctly there will be no capital gains tax payable on the transfer of the property to the SMSF trustee once the loan is fully repaid.

Superannuation changes from 1 July 2017

From 1 July 2017, superannuation fund members will be limited to having $1.6 million in their retirement pension account. The limit is the general transfer balance cap for the 2017/2018 financial year. The $1.6 million cap is measured against the net assets value in the retirement pension phase. This means, if the member’s pension account is represented with a property with a market value of $2 million and it has an outstanding loan of $500,000 under a LRBA, then the net asset value is $1.5 million.  

The Government has introduced changes to the law where any LRBA entered into on or after 1 July 2017 will require SMSF members to record a credit in their transfer balance cap where the LRBA for an asset held in the retirement phase has its principal and interest paid from money held in the accumulation phase. The changes will not apply to LRBAs that are in place before 1 July 2017.

However, where a loan repayment is sourced from assets that actually support the retirement phase (such as rental income from the property) the payment has no effect on the value of the retirement assets, because any reduction in the LRBA liability is offset by a corresponding reduction in cash. In this situation, there is no change to the member’s transfer balance cap.

Property acquisitions using related parties loans will continue to remain popular amongst SMSFs trustees while the law still allows for them.     

Monica Rule is an SMSF Expert and author of the book “SMSFs and Properties” www.monicarule.com.au

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related Documents:

• SMSF Limited Recourse Borrowing Arrangement
• Self Managed Superannuation Fund Deed
• SMSF – Deed Update
• Build a Company (ELodgement)
• SMSF Full Valuation

Related Webinars:

• Webinar Recording - Understanding The 2017 Superannuation Changes
• Webinar Recording - Tips And Traps For Property Investment In Your SMSF
• Webinar Recording - SMSFs And Related Party Loans
• Webinar - Time to Address the SMSF Sleeper - Estate Planning within the fund