SMSF trustees considering the use of an intermediary limited recourse borrowing arrangement (LRBA) must disclose the use of any associated holding trusts to lenders to prevent breaches of in-house asset rules.
DBA Lawyers lawyer Shaun Backhaus said the recent release of the ATO’s SPR 2020/1 gave clarity around whether an LRBA held by a holding trust, in which SMSF trustees were beneficiaries, was not an in-house asset, but stressed this only applied when full disclosure was made at the time of borrowing.
Backhaus said SMSF trustees may set up a holding trust to access better interest rates on an LRBA loan compared to what they may receive as an SMSF trustee, and pointed out that while this arrangement appears to create an in-house asset, SPR 2020/1 makes allowances for intermediary LRBAs.
“Typically, this sort of arrangement where the SMSF trustee is the beneficiary of the trust will be an investment in a related trust, even in a normal LRBA,” he said.
“The Superannuation Industry (Supervision) Act section 71(8), which defines in-house assets, gives us an exception for LRBAs and states it will not be an in-house asset where ‘the related trust is one described in paragraph 67A(1)(b) in connection with a borrowing, by the trustee of the fund’.”
He said this section of the act means an SMSF trustee does not borrow where a holding trust has been used to make the LRBA, and SPR 2020/1 provides that if the arrangement between the SMSF and holding trust meets the definition of an intermediary LRBA, it will not be an in-house asset.
“Arrangements that meet the definition will have the comfort of this instrument and it is effective from 24 September 2007 when in-house assets rules first came in,” he said.
“One key point which I want to make clear is that this instrument requires that the arrangement and documents between the holding trustee and the SMSF are disclosed to the lender at the time of borrowing.
“I suggest in those cases where those documents are not disclosed to the lender at time of borrowing, and that is a requirement, to have any comfort from the instruments, that requirement still needs to be met.”
