Trustees with limited recourse borrowing arrangements (LRBA) need to look beyond the payout of the arrangement to ensure their fund stays compliant, an audit specialist has said.
In a blog post on the ASF Audits website, technical services executive manager Shelley Banton said what trustees did after an LRBA payout was crucial to a “hassle-free” audit of their fund.
“The last step of the journey isn’t when a fund makes their final LRBA payment. Like everything to do with an SMSF, it’s the housekeeping that keeps a fund compliant and out of the ATO spotlight,” Banton said.
She pointed out even though there was no requirement for a property title to be transferred back into the name of the fund once the LRBA was repaid, trustees should be aware of key conditions provided by the ATO as part of its Self-Managed Superannuation Funds (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014.
“The SMSF trustee must be able to demonstrate the asset was subject of an LRBA that resulted in the asset not being an in-house asset of the fund at all times, from when the holding trust began to hold the asset until the borrowing was repaid,” she said.
“It is therefore critical that SMSF trustees keep all LRBA documentation for as long as the holding trust holds the asset.”
Funds unable to provide auditors with the holding or bare trust deed and the original loan agreement could be found to be in breach of certain sections of the Superannuation Industry (Supervision) Act 1993 and Superannuation Industry (Supervision) Regulations 1994, she added.
She also highlighted a failure by trustees to remove the mortgage once the LRBA had been paid out as a significant issue likely to cause problems during the audit of their fund.
“Failure to remove the mortgage can result in the SMSF facing compliance issues,” she noted.
“While an SMSF auditor may allow a small period of grace to remove the mortgage where the loan is paid out close to June 30, they will not be so accommodating in the second year.”
Last week, the ATO notified trustees of changes to the 2020 SMSF annual return form and highlighted the inclusion of a new label affecting funds with LRBAs.