LRBA, Trusts

Unit trust LRBAs lose safe harbour protection

unit trust LRBA

Safe harbour provisions applied to real property LRBAs are not mirrored if the arrangement is set up within a unit trust.

SMSFs looking to invest in property via a unit trust structure should be aware any use of limited recourse borrowing arrangements (LRBA) to do so will not mirror the safe harbour terms applicable to real property, according to a lawyer.

DBA Lawyers senior associate Shaun Backhaus said the safe harbour provisions related to the use of an LRBA for property investment via a unit trust were outlined by the ATO in SMSF Regulator’s Bulletin 2020/1 and remained an area of interest for the regulator.

“The ATO has been talking about an SMSF borrowing using an LRBA to acquire units in a unit trust and you cannot rely on mirroring the safe harbour terms in Practical Compliance Guideline (PCG) 2016/5 to show this is consistent with an arm’s-length dealing,” Backhaus said during a recent briefing on SMSFs and property investing.

“These safe harbour terms only apply to borrowings over real property or listed units, not unit trusts, and you need to demonstrate the loan terms reflect an arm’s-length dealing by showing they replicate the terms of commercial loans available under the same circumstances.

“The ATO is clearly making the point that PCG 2016/5 doesn’t apply and that is probably because people assume it can, and they have also pointed out how difficult it can be for a trustee to identify an arm’s-length lender that will provide finance for that kind of investment.

“When you do have these situations, you need to go get benchmark evidence, but it is very hard to get it because what lender will actually lend to an SMSF for unlisted units?”

He added parties to an LRBA arrangement should also be aware any non-arm’s-length property developments may attract the application of Part IVA and anti-avoidance under the GST rules if the ATO objectively concludes there was a sole dominant purpose of obtaining a tax benefit.

In the same briefing, he noted SMSF trustees who provide services to a unit trust in which their fund has invested may also be breaching the non-arm’s-length expenses provisions and should consider using third parties for those services.

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