LRBA offsets can create breach

LRBA offset

LRBAs with offset accounts may breach superannuation laws if they create a charge over the fund with caution advised regarding loans from non-bank lenders. 

SMSFs with limited recourse borrowing arrangements (LRBA) should examine the operation of any offset accounts tied to the loan that may cause the fund to be in breach of superannuation rules, according to a lending specialist.

Bluestone head of specialised distribution Richard Chesworth said the shift from bank to non-bank lenders as a source of LRBAs has altered the nature of an offset account inside those arrangements and their use could place a charge over an asset in the SMSF, which was not allowed under the Superannuation Industry (Supervision) (SIS) Act.

“LRBAs with an offset from a bank are not an issue because as authorised deposit-taking Institutions, banks are licensed to hold deposits and those separate deposit accounts are not directly captured under the mortgage,” Chesworth told selfmanagedsuper.

“However, while non-banks are the primary lenders for LRBAs, they are not approved to hold deposits and an offset account with a non-bank lender is usually a sub-account of the loan facility.”

He said this distinction was important because an LRBA was limited to the acquisition, maintenance and repair of the property and the rights of a lender were limited to an acquired asset.

“Having the offset account as a sub-account raises the question of whether the lender has a charge over an asset of the SMSF other than the acquired property, which is not permitted under the SIS Act,” he said.

“Additionally, if the ATO was to decide the offset was not an asset of the SMSF but was being used as a redraw facility, is that being used solely for the acquisition, maintenance and repair of the asset linked to the LRBA or arrangement?

“Any other use, such as improving the property while the SMSF loan is in place or assisting with the deposit for another property purchase, may be deemed non-compliant.”

He said there was limited guidance on the use of offset arrangements under an LRBA and given the rules had not been tested, Bluestone did not include an offset in its SMSF residential loan offering.

“We have also not applied for a ruling because the fundamentals state non-bank lenders can’t offer separate deposit accounts to offer SMSF offset arrangements, but given it’s a common question we receive from mortgage brokers, accountants and financial advisers, we wanted to highlight the risks to them,” he said.

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