A negative SMSF member balance should never eventuate due to the fact the fund has a limited recourse borrowing arrangement (LRBA) in place, a technical manager has said.
The situation can occur if the loan balance exceeds the value of the asset acquired under the LRBA as a result of a decrease in the value of the asset in question.
However, the key characteristic of an LRBA should mean this situation never arises, Heffron head of SMSF technical and education services Lyn Formica noted.
“In that situation I don’t think we should end up with a negative member balance because an LRBA should be a limited recourse loan,” Formica told delegates at the Heffron Super Intensive Day 2021 held last week.
“So it really [should be] a case of revaluing the loan because if the lender was to foreclose, the only amount they’re going to get from the fund is the asset itself. The loan is only worth the value of the asset, [so if you] revalue the loan downwards to the value of the asset, [you] won’t end up with a negative member balance.”
According to Formica, a negative member balance can also more commonly be the result of insurance cover included inside the SMSF.
“[In these circumstances] the member has not had enough of a member balance to cover the premiums that are being deducted from that account,” she noted.
This scenario can be easily corrected as well, she pointed out.
“If [a negative member balance] has come about due to insurance premiums, what we typically do is raise a trustee indemnity asset sufficient to bring the member’s balance back to zero and ask the member to contribute the shortfall if they are eligible to do that,” she said.
She reminded advisers and trustees that the governing rules of the fund will determine whether negative member balances can exist in an SMSF.
“Certainly our preference at Heffron is to not allow member balances to go into negative,” she said.
