Advisers and accountants assisting their SMSF clients implement a strategy involving a limited recourse borrowing arrangement (LRBA) should ensure the trustees have approval for the loan before they look to purchase the asset in question, according to a sector specialist.
Speaking at the Chartered Accountants Australia New Zealand 2016 National SMSF Conference in Melbourne last week, NowInfinty head of technical Julie Dolan said: “It’s always a good idea, through a broker, to get a pre-approval done. Make sure your clients do that so they’re not rushing out on the weekend and getting excited over an auction and saying ‘we want to buy this’ and then having to go through the heartache of seeing if the clients can afford it, let alone having to backtrack the structuring.
“It’s always worthwhile to go and get a pre-approval to make sure the clients understand the costing because lenders are getting harder and tighter depending on what sort of assets there are, what the purpose of the asset is and where it’s located.
“There’s some really interesting criteria with some of the lenders I’ve seen.”
Dolan also recommended advisers and accountants make sure the holding trust involved is of sufficient quality so as not to cause additional complications.
“Many times, especially when dealing with the big banks, their internal solicitors will keep going back and forth with queries [about the trust, which may lead to having] to get the solicitors to produce deeds of ratification to fix up things with the holding trust,” she noted.
“This can just hold up settlement, can be expensive and it can be very stressful to clients if you have to be explaining that there are issues [with the holding trust].”
It was also important for practitioners advising clients about LRBAs to understand the obligations of the trustee or trustees of the holding trust, she added.
In particular, she said it was important to know the trustees of the holding trust need do nothing else than acquire the legal title to the relevant asset.
“The trust doesn’t need to set up a bank account, it doesn’t need to be registered for GST, it purely just holds that asset,” she said.
“If it has a bank account and starts processing rent and expenses, that’s a breach of the SIS (Superannuation Industry (Supervision)) Act and it starts to taint that actual character of that trust.”