Using a Limited Recourse Borrowing Arrangement to purchase property in an SMSF

One of the major misconceptions with purchasing a property in a super fund with borrowings is that the process and requirements are the same as those when you purchase a property personally. This couldn’t be further from the truth. In terms of gaining a loan in the first place, many banks are currently tightening the restrictions around approving SMSF loans, while other financial institutions have left the SMSF lending market all together. This coupled with complex legal structures, and the importance of the order in which things need to be done can often result in people getting themselves in quite a mess and incurring unnecessary expenses.

The only type of lending arrangement an SMSF can enter into is a Limited Recourse Borrowing Arrangement (LRBA). The property is security for the loan, and no other assets of the SMSF can be used as additional security. The property purchased must be held in a bare trust, on trust for the SMSF. This bare trust will require a trustee (preferably a company).

CONSIDERATIONS FOR SETTING UP A LIMITED RECOURSE BORROWING ARRANGEMENT

• Get pre-approval first. Especially if you don’t already have an SMSF and the only reason you are contemplating one is to borrow to purchase property. It can be a costly and time consuming process if you set everything up only to find out you can’t get finance. As I said earlier the requirements are much more stringent than regular borrowing. One of the major financial institutions have just announced that an SMSF would need to have at least $200,000 liquid assets before it would be considered for loan approval.
• Ensure the super fund’s trust deed allows the SMSF to borrow money via an LRBA.
• The fund’s Investment Strategy needs to include investment in property and borrowings and it should be evident that all risks have been considered.
• The trustee of the SMSF cannot be the same as the trustee of the bare trust.
• An SMSF can have either individuals or a corporate trustee. However, many lenders will require the SMSF to have a corporate trustee. The same with the bare trust trustee.
• Don’t use personal money for any part of the deposit as you may incur double stamp duty.
• The purchaser on the contract must be the trustee of the bare trust NOT the SMSF.
• The certificate of title will show the bare trust’s trustee as the legal owner.
• SMSF Trustee is the borrower, signatory on the loan and mortgage documents with the lender.
• All costs should be paid out of the SMSF bank account or from lending facility as part of settlement.
• Any lease agreement involving the property should be made with the bare trust trustee as the landlord.
• The bare trust deed should be stamped. Its not a compliance issue from an SMSF point of view, but when the mortgage is discharged, if you decide to move the property title back to the SMSF, you will only pay nominal duty if the deed has been stamped.
• You can also end up with stamp duty nightmares if you don’t sign documents in the right order. The LRBA documents have to be signed either before or after the contract of sale, depending on the state or territory where the property is located. The amount of duty the SMSF will pay is determined by the order in which they are signed. You may end up with multiple payments of duty depending on the order. Ensure you receive specialist advise applicable to your location.
• The bare trust and trustee do not need a TFN or ABN, nor does they need to have a bank account opened in their name. There is no tax return required of the bare trust or trustee. Everything goes through the SMSF.
• Purchasing a property off the plan – ensure you get the description of the property on the holding trust deed correct. This often isn’t available until after the contract is signed. You may lose stamp duty concessions on moving the property back to the SMSF when the mortgage is discharged if it is unclear or difficult to identify the property mentioned in the bare trust deed.
• It was thought there would be an in-house asset issue if on discharging the mortgage, the property was left in the bare trust. It was therefore critical to transfer the property into the super fund. However, the ATO have now advised that the fund’s interest in the bare trust will no longer be considered an in-house asset merely because the loan has been paid. So the property can remain in the bare trust following the final payment of the loan.

If the LRBA is not set up correctly, not only may you incur hefty duties, you could possibly be forced to sell the property which may result in a loss and significant depletion of your superannuation balance.

Always consult with a reputable, appropriately qualified and experienced professional to assist you in setting up an SMSF and LRBA, should it be an appropriate strategy for you to build your retirement savings. 

Important information

This content has been prepared by Culburra Beach Accounting & Tax.The information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, Culburra Beach Accounting & Tax disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.