31/10/2012

With spring and property sales in full swing it’s a good time to talk about real property held by SMSF’s purchased using a limited recourse borrowing arrangement (‘LRBA’).

During the life of a LRBA there are a number of things that may require your attention.

1. What rent is being charged on the property?

This is particularly important for commercial property with a related party tenant.  (In-house asset rules would be triggered if a related party tenant occupies or uses a residential property.) The SIS Act provides in s109 that when related parties deal with the Fund that it must be at arms length.

The rent should be no more favourable to the tenant than if the landlord was an unrelated party.  It is also worth noting that an inflated rent which is above market value would also fail to satisfy the arms length test and could even result in an assessment that deemed contributions are being made to the Fund.

2. Refinancing the existing loan

If you are looking to refinance the loan made to the Fund Trustee with another financial institution, many banks require a certificate of compliance. This is a legal review of the transaction documents and a statement from your superannuation lawyer that the transaction was compliant with the SIS Act.

In addition to this, some lenders have a compulsory in-house Holding Trustee or Custodian that is mandatory for you to use when establishing a LRBA.  If your current lender has an in-house Holding Trustee as part of your LRBA and you are refinancing with a different lender you will need to arrange for a new Holding Trustee to be established and appointed, since the original banks in-house Holding Trustee will no longer be used after the refinance.  After that appointment you will need to organise for the transfer of title for the property from the previous (in-house) Holding Trustee to the new Holding Trustee.

If the Loan is from a related party lender (for instance a member) they may wish at some stage to change the terms of the loan.  Depending on the nature of the change required this too might result in what would be considered a refinance of the original loan.

3. Unwinding the LRBA when the loan has been repaid

It is important to stay aware of the balance of the loan.  When it has been paid out the property must be transferred from the Holding Trustee to the Fund Trustee as soon as practicable.  If there are no longer any moneys owing on the property and it remains in the Holding Trust it is no longer considered to be part of the LRBA.  Without the LRBA exemption the holding trust now becomes a related party trust and you will encounter in house asset issues.

TOWNSENDS BUSINESS & CORPORATE LAWYERS have a specialist Limited Recourse Borrowing Arrangements team who can assist you with your property enquiries.

If you have any questions in relation to this article, please contact (02) 8296 6222.