LRBA, Superannuation

LRBA guarantees may trap the unwary

SMSF guarantees LRBA

SMSF members with personal guarantees for an LRBA should be aware any COVID-19-driven payments will be seen as contributions unless recouped from the fund.

SMSFs with a limited recourse borrowing arrangement (LRBA) that also involves personal guarantees should check the nature of the arrangement to ensure any payments are not considered deemed contributions, an SMSF legal expert has recommended.

DBA Lawyers special counsel Bryce Figot said the issue of arm’s-length lenders calling on personal guarantees over an LRBA would be an area of concern for some SMSF given the economic stresses related to the COVID-19 pandemic.

Figot pointed out most LRBAs from an arm’s-length lender had a personal guarantee from the SMSF members and while lenders may not have called on a guarantee, “it’s possible they will do so and no one would be surprised if it did happen”.

If this did occur, he said the nature in which that guarantee was paid to the lender would determine if the amount paid was considered a contribution to the SMSF.

“If a related party pays something on behalf of the super fund, on its face that is a contribution. It’s not a contribution if the guarantor – under the right of subrogation – then stands in the shoes of the lender and pursues the SMSF on an arm’s-length basis,” he said.

He pointed out that where a guarantor pays a lender and does not attempt to recover the money from the SMSF on an arm’s-length basis and the fund retains the asset, this would be considered a deemed contribution.

“Therefore, if the SMSF is retaining the asset, the guarantor should attempt to recover from the SMSF, for example, by forcing the asset to be sold and taking the proceeds or taking over the asset,” he said.

The situation would be reversed if a lender forces the asset to be sold and takes the proceeds or takes the asset and the guarantor pays the lender for any shortfall, but does not attempt to recover that money from the SMSF on an arm’s-length basis, he said.

He also pointed out the rights of a guarantor against the SMSF would be reduced to zero if the lender forced the sale of the asset, even where the guarantor paid any shortfall after the sale of the asset.

“Because it is supposed to be a limited recourse loan, the bank has no rights against the SMSF, but the guarantor can still be asked for more money,” he noted.

“In turn, the guarantor can stand in the bank’s shoes and any rights against the SMSF will become their rights, but if the rights against the SMSF by the bank were reduced to zero, the guarantor’s rights should be zero as well.”

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