News

LRBA

Loan relief not an opportunity

LRBA loan relief

Setting up a new related-party LRBA to benefit from the COVID-19 loan relief provisions runs counter to the intention of the measure and should be avoided.

A technical manager has warned individuals against entering into new related-party limited recourse borrowing arrangements (LRBA) to take advantage of the COVID-19 loan relief provisions.

“At the core of the relief is that an SMSF trustee needs to evidence that due to the financial impact of COVID-19 they are unable to meet loan repayments. This means that this relief only applies to existing complying LRBAs in place at the time of the pandemic and should not be relied upon by trustees as an opportunity to enter into new related-party borrowing arrangements to take advantage of deferred interest repayments,” SMSF Association technical manager Mary Simmons said.

Simmons acknowledged entering into a new related-party LRBA had other advantages as well, such as the tax deductible nature of the associated interest and borrowing expenses, and recognised the sale of the property to the SMSF will release some preserved superannuation benefits to a related party.

However, she noted there were other associated drawbacks as well.

“The SMSF Association has continually noted the importance of LRBA strategies for small businesses investing in real property and the flexibility they bring when used appropriately. However, trustees entering into new LRBAs with related parties, in the current environment, should do so cautiously to ensure that the sole purpose test is not at risk,” she said.

She also provided a word of caution for individuals to consider the total super balance (TSB) ramifications of having assets held under an LRBA in their SMSFs.

“All new LRBAs with an associated lender from 1 July 2018 will see all members whose interests are supported by the LRBA asset have their TSB adjusted to reflect their share of the outstanding balance of the loan,” she said.

This situation in turn could have other significant implications for SMSF members, she noted.

“The inflation of a member’s TSB in turn limits a member’s ability to make non-concessional contributions and catch-up concessional contributions, which may impact a fund’s ability to meet loan repayments,” she said.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital