Compliance, In-house assets, LRBA

Loan key to holding trust asset

LRBA gearing strategy

An LRBA of any magnitude should be used for compliance purposes if an associated holding trust has acquired the asset in question.

SMSF trustees should still follow through on a gearing strategy involving a limited recourse borrowing arrangement (LRBA) if a holding trust set up for that purpose has already acquired the asset in question to eliminate compliance risk, a senior industry executive has recommended.

Smarter SMSF technical and education manager Tim Miller made the suggestion to practitioners as a result of an actual situation he recently encountered.

“We had a client who went to enter into a limited recourse borrowing arrangement, but they acquired the property in the holding trust and then, for other reasons, felt they didn’t need to borrow money anymore [to facilitate the transaction],” Miller told attendees of a SuperGuardian webinar he hosted last week.

“So the risk we felt that this client had was they had acquired this asset in a related entity and [the situation] could potentially burden that entity with [being caught by Superannuation Industry (Supervision) Regulation] 13.22C and those other restrictions all because they hadn’t entered into a loan.”

He pointed out the solution to the situation was to commit to the original asset acquisition strategy with amended terms.

“What we said was: ‘Why don’t you enter into a very small related loan in accordance with the PCG (Practical Compliance Guideline) 2016/5 terms because then you can extinguish that loan and by doing that [it will allow you to] meet the condition of the [ATO’s] SPR 2014/1 [defining the in-house asset rules],’” he said.

To this end, he pointed out SPR 2014/1 dictates an in-house asset is not deemed to exist if the related trust to an SMSF exists for the purpose of entering into an LRBA.

While he indicated the conclusion his firm reached was for the client to take out a small loan to satisfy their compliance obligations, he recommended individuals facing this situation should seek legal advice regarding the issue.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital