Real property problems not about LRBAs

LRBA property spruikers

The ATO’s decision not to target LRBA usage in its focus on SMSFs acquiring property reflect its intererst in identifying spruikers.

A specialist fund manager has applauded the ATO’s decision to resist imposing direct measures against limited recourse borrowing arrangements (LRBA) in order to address the problem of property spruikers using these facilities to entice individuals to potentially inappropriately establish an SMSF.

In recent weeks the regulator confirmed the letters it sent out to 17,700 SMSF trustees last month questioning investment strategies were aimed at those funds invested in a single asset, the majority being property, through the use of an LRBA.

“The statistics published by the regulator continue to show that LRBAs remain at a level that is nowhere near problematic for SMSFs and that the real problems identified can and should be effectively dealt with through regulation and enforcement to eliminate any identified abuses,” Thinktank head of research Per Amundsen said.

“The ATO’s efforts with respect to Investment Strategies and the late submission of annual returns is a great start to this as are ASIC’s (Australian Securities and Investments Commission) enforcement actions in recognition of failings by licensed advisers and others who owe a duty of care to trustees and members,” he added.

Amundsen’s comments come in response to calls to ban the practice of incorporating personal guarantees in LRBAs – a position he opposes.

“Guarantees used to support LRBAs are specifically provided for in the SIS (Superannuation Industry (Supervision)) Act and ensure that their recourse to other SMSF assets is no less limited than the original lender, and if funds are provided as a source of repayment these are then deemed to be contributions to the SMSF,” he explained.

Further, he argued the rules governing LRBAs were not in need of amendment as the majority of SMSF assets acquired under these borrowing mechanisms were not residential properties, the practice most concerning to the ATO.

“In the February 2019 Council of Financial Regulators report, non-residential real property made up 46 per cent of that supported by LRBAs and is known as ‘business real property’ when used ‘wholly and exclusively’ for business purposes,” Amundsen said.

“It’s recognised that owner-occupied business premises make up a large part of this type of funding and that SIS Act regulations were specifically designed to allow for them. The benefits this offers to SME operators in planning and providing for their retirement cannot be questioned.”

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