The problem of SMSFs being established specifically to invest in property using a limited recourse borrowing arrangement (LRBA) is showing signs of abating, according to a specialist commercial property financier.
During a panel session at the recent Self-managed Independent Superannuation Funds Association 2019 SMSF Forum, Thinktank director Per Amundsen said: “We’re finding less new establishments of SMSFs [looking to use gearing], with people who already have SMSFs, especially those running a business [wanting to acquire] business real property, being the business premises of the SME (small to medium-sized enterprise) operator, [using gearing] as the most popular [borrowing arrangements] that we’ve seen.
“We think regardless of the debate around other pros and cons [regarding LRBAs], that has a long life ahead of it.”
The ATO sought to address the issue of SMSFs potentially inappropriately being established to acquire a single asset or asset class using an LRBA earlier this year by sending 17,700 letters to trustees in this situation in an effort to assess their compliance practices.
While Amundsen recognised opportunities still existed for service providers with borrowing solutions for SMSFs with regard to property purchases, fellow panellist AG Tax Lawyers director Andrea Carrick warned sourcing funding for other legitimate borrowing strategies within an SMSF would very difficult.
Carrick cited using an LRBA to acquire units in a regulation 13.22c non-geared unit trust defined by the Superannuation Industry (Supervision) Regulations as an example.
“An SMSF could certainly undertake an LRBA to acquire the units in [such a] unit trust and use the monies that way, so basically capitalise and fund the unit trust to purchase the asset,” she said.
“It’s got to be a permitted asset and you’ve got to set it up appropriately under the 13.22c regulations and requirements so that when the fund buys those units under the borrowing, it does constitute a permitted asset.
“The issue I see with that is I don’t think there are many third-party lenders that would lend on that basis and take security over the units as opposed to what’s likely to be the real estate sitting in the unit trust.”
She said this would mean the only LRBA that could be used in this situation is a related-party loan, in turn introducing further complication to the strategy.
“We then have the issue of how do we establish the arm’s-length terms of that loan. Our ATO compliance guide doesn’t deal with unlisted equities and how do we then get evidence of benchmarking in terms of that loan,” she noted.