An SMSF specialist law firm has suggested certain situations where an SMSF property is acquired using a limited recourse borrowing arrangement (LRBA) may require the establishment of multiple bare trusts to avoid any compliance issues.
DBA Lawyers director Daniel Butler said an example of where this might be the best option is when a car parking space is associated with but separate from a property, meaning an LRBA used to acquire the property cannot include the ancillary asset due to the single acquirable asset rule under section 67A of the Superannuation Industry (Supervision) (SIS) Act.
Butler pointed out these circumstances are sometimes made even more complex as some state laws can prevent the associated asset, in this case the car park, from being held in the name of the SMSF.
“If the asset is not held in the name of the super fund trustee, the auditor may not be happy under SIS regulation 4.09A [where the auditor must be satisfied] all of the assets are in the name of the SMSF,” he told attendees of a recent online update he hosted.
“So if you’ve got these car [parking spaces] in the name of the custodian, but there is no borrowing, that may not look good. So, therefore, what you may need is a non-LRBA bare trust.”
Further, he noted satisfying audit requirements does not need to be the only reason to use non-LRBA bare trusts.
“[We had a client] in this situation and they did [hold the car parking spaces] under a non-LRBA bare trust purely because they didn’t want a future sale made more complex by selling the [property] from the custodian and then having the car [parking spaces] sold from the super fund,” he said.
“While intrinsically there is no problem with that, they thought it was best that the car [parking spaces were] also in the name of the custodian.
“So in this case the client did put the car [parking spaces] in the name of the custodian, the [purchase] was made in cash, there was no separate LRBA, but they did that on a separate bare trust.”
He recommended trustees looking to use a non-LRBA bare trust get advice before doing so as duty provisions differ in each state.
