Asset transfer after LRBA optional

SMSF LRBA limited recourse borrowing arrangement bare trust transfer

SMSFs do not have to transfer an asset from a bare trust after paying off an LRBA, but not doing so will constrain its use by the fund.

SMSFs that have fully paid a limited recourse borrowing arrangement (LRBA) are not required under superannuation law to move an asset from its holding trust, but not doing so will limit its future use.

Accurium senior SMSF educator Anthony Cullen said while most SMSF practitioners were aware of the need to hold an asset in a bare trust when a fund was acquiring it via an LRBA, there was some confusion about what happens when the underlying loan is fully paid.

“The asset is being held on trust on behalf of the SMSF which has a beneficial interest in that asset and once the loan is paid off, the fund has a right to acquire that asset,” Cullen said during a webinar today.

“Now it’s worth pointing out there is a right to acquire the asset, but there is no legal obligation for the asset to be transferred to the SMSF once the loan has been paid out.

“I raise that because there still seems to be some thought that there has to be a transfer of that asset.

“We’ve seen there are still some auditors who, in their management letter, raise this issue with trustees saying they need to transfer the asset, but there’s nothing in the rules that requires that.”

He added that where a transfer did not take place, an SMSF was limited in what it could do with the asset and should check how it was viewed under the LRBA rules in the Superannuation Industry (Supervision) Act.

“Bear in mind, if you do not transfer the asset, you are still bound by the borrowing rules.

“So in terms of making any changes to the asset, so if you want to do some improvements, you still can’t change the nature of the asset while the asset is in the bare trust arrangement.

“As much as I disagree with auditors about having to transfer the asset to the fund, one thing I do agree with them is once the loan has been paid out, you should have the mortgage removed from that asset.

“Without removing the mortgage there is still a charge over the asset and you’re potentially going to have a breach of SIS regulation 13.14.”

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