SMSF members need to turn their focus to funding issues rather than compliance matters when looking at using a limited recourse borrowing arrangement (LRBA) to acquire an asset for a fund, a technical expert has advised.
“We as technicians are more focused on the rules, like is it a single acquirable asset, making sure the contract is executed correctly, depending on the state the timing of when the LRBA is executed … we focus on all those technical issues. Where I think we need to focus more on, or as equally as much, now [is] where the funding is coming from,” SuperConcepts SMSF technical services executive manager Mark Ellem told delegates at the SMSF Association Technical Day 2018 in Sydney last week.
To illustrate the point, Ellem cited examples of his own experience with financial institutions in, so far unsuccessfully, trying to put an LRBA in place for his own SMSF.
One item requested before a loan could be granted was a certificate from a financial planner, he said.
“[I don’t use a planner] so I had to find a planner who understands this need in order to get a certificate. They wanted a certificate from my auditor, which when we went through the list of what they wanted to cover was basically the audit report, but we couldn’t give them the audit report because they’d only accept a certificate,” he said.
“And then they wanted a certificate from a lawyer saying the fund complied. Those three certificates cost more than it did to set up the LRBA in the first place.”
He pointed out some of the financial institution’s own internal processes can prove to be additional LRBA barriers for SMSF trustees, such as minimum loan amounts.
“I went through one process with a lender and they said ‘we’ll give you $185,000’. I said ‘yes, we can settle that’, but then they said ‘we can’t do the deal’. I asked why, when they just said they’d give me $185,000 and they said ‘our minimum loan amount is $250,000’,” he said.
According to Ellem, other barriers to securing LRBA funding included differing property valuations, a reluctance to lend money for brand new properties and related-party transactions issues, as well as very slow response times.
“I’m just telling you this is my first real experience [with LRBAs and] that the hard part wasn’t setting up and making sure it complies with all the LRBA [rules], the hard part was going through the loan application process and getting the money,” he noted.