An SMSF can use a limited recourse borrowing arrangement (LRBA) to acquire more than one asset for a property development project by using a trust structure but doing so may introduce additional compliance risks and breach superannuation laws, according to a legal expert.
Sladen Legal principal Phil Broderick noted while the ATO has made its position clear on the use of a LRBA to finance the acquisition of multiple properties and the development of those assets, he had observed situations where it was still permitted.
“If you’ve got property in suburb A, suburb B and suburb C, they’re clearly different assets and the rules are pretty clear, they’re not single acquirable assets,” Broderick acknowledged during an Institute of Financial Professionals Australia briefing last week.
“One way that practitioners have been getting around all those rules is to invest in a Superannuation Industry (Supervision) (SIS) Regulation 13.22C unit trust and then use an LRBA to acquire the units.
“The lender lends to the SMSF [and the fund] sets up a bare trust. The bare trust buys the units in the 13.22C unit trust. It buys property or multiple parcels of property and engages the developer on an arms-length basis.
“In that way, even if the property is subdivided or changes its character or the borrowings are used for capital improvements, that’s okay. It doesn’t cause a breach of the LRBA rules because that’s all above the unit trust level [and] the super fund has got units and they haven’t changed,” he explained.
“That’s seen as a way of getting around some of those restrictions.”
However he warned this arrangement carried its own set of risks, as it could potentially breach othe SIS regulations or trigger the non-arm’s-length expenditure rules.
“That’s how the law works, the ATO can’t say, ‘you can’t do that’, but they do raise issues. They say if you do the development at the 1322.C unit level, you might breach [SIS regulation] 13.22D,” he explained.
“More importantly, and this is where they really will go after [this activity] in practice, you can’t use safe harbour terms therefore [the ATO will ask you to] show evidence that [the arrangement] is on an arm’s-length basis. If it’s not, then [he regulator will] seek to apply non-arm’s length expenditure [rules].”
