SMSFs do not need to transfer property purchased via a limited recourse borrowing arrangement (LRBA) back to the fund as soon as the debt is paid off, an SMSF expert has said.
Heffron SMSF Solutions head of SMSF technical and education services Lyn Formica said trustees should not assume it was compulsory to transfer a property title to an SMSF from the LRBA bare trust once the borrowing under an LRBA is paid back.
In a blog post on the Heffron SMSF Solutions website, Formica recommended trustees base their decision on whether or not to transfer title to their SMSF on the fund’s future plans.
The key advantage of transferring title from the bare trust to the SMSF was that it would be freed from the constraints associated with LRBAs, she noted.
“Whilst the property remains held in the bare trust, it remains subject to the usual LRBA restrictions. This means there must not be any fundamental changes to the character of the property, even after the debt has been paid out,” she said.
“For example, if the property was on a single title and, now that the debt has been paid out, the SMSF trustee wishes to use existing fund cash to sub-divide the property into two titles, title to the property would first need to be transferred from the bare trust to the SMSF.”
She pointed out transferring title to the SMSF would also provide the option of deregistering the corporate trustee of the bare trust and said a bare trust could not be “reused” in the event of such a transaction.
“If the fund wishes to purchase a new property via an LRBA, a new bare trust arrangement will need to be established (although the company which was trustee of the original bare trust could be the trustee of the new bare trust),” she added.
“Where the SMSF trustee intends to dispose of its interest in the property in the near future, it may be simpler and cheaper to leave the bare trust arrangement in place until disposal.”
