SMSFs with limited recourse borrowing arrangements (LRBA) must remember any refinancing needs to be treated in the same way as the initial loan and can only be used for a very narrow set of purposes spelled out in the Superannuation Industry (Supervision) (SIS) Act, a technical specialist has stated.
Heffron SMSF technical and educational services director Leigh Mansell said while the SIS Act allowed SMSFs to refinance an LRBA, it stated there were limits on those borrowings and how they could be used before the fund breached the law.
Speaking during a recent webinar hosted by Heffron, Mansell addressed the case of someone who had acquired an asset with an LRBA that was later refinanced and some of the proceeds of that action were used to pay a land tax bill.
“The trick with refinancing is you’ve got to be careful how much you refinance for,” she said.
“The SIS Act says you can definitely refinance an LRBA – no problem with that, as long as the amount is no more than the outstanding amount of the previous borrowing.”
She added the size limit was the first consideration, but SMSF trustees also needed to be aware they were restricted in how the borrowed monies were used in their fund.
“The new borrowing can only be used to extinguish the previous borrowing, as well as any costs associated with the refinancing itself or if there’s any repairs and maintenance costs of the asset at the time of refinancing,” she noted.
“You can borrow for those things and roll forward with that, but if you use any of the refinancing proceeds for any other reason, no matter what they are, that’s a breach of the borrowing provisions.
“I have heard of a client in the past that used the refinancing money to pay a benefit payment out to a member, but that wouldn’t cut it and you would have a breach of the SIS Act.
“So you have got to be really careful on how much you refinance for and what you use the proceeds for.”
