SMSF trustees and advisers should ask non-bank lenders offering limited recourse borrowing arrangements (LRBA) to provide them with details as to whether the loan has an offset account and what happens it is discharged, a senior sector executive has advised.
Bluestone head of specialised distribution Richard Chesworth suggested the recent updated guidance from the ATO regarding offset accounts offered by non Authorised Deposit-taking institutions (ADI) meant borrowers had to look past the ‘first-page’ of the loan agreement and into its terms and conditions.
“The ATO has confirmed in Tax Ruling 93/6 that for tax purposes an offset account can be structured through a sub-account of the loan,” Chesworth told selfmanagedsuper today.
“While the tax ruling applies for the treatment of income tax and fringe benefit tax, it doesn’t take into consideration any interpretation of an LRBA.”
He said this was important as the ATO guidance stated an offset account offered by non-ADI lender was not considered a bank deposit and may give rise to a borrowing or charge over an SMSF’s assets.
“It is important to understand that in the case of a non-bank lender, an offset sub-account is not a separate deposit account.
“A simple way to find out whether this is the case with an LRBA from a non-bank lender is to ask them the question of when the loan is fully discharged will the offset account remain or will it be closed?”
“If the loan provider says the offset account will close at the same time, it is a sub-account and it will be important to examine the loan’s terms and conditions to ensure no other charges remain over the asset.”
According to Chesworth some non-ADI lenders offer offsets for LRBAs based on their interpretation of the law and this was a further area in which questions should be asked.
“I would ask how they come to their position in light of Tax Ruling 93/6 and the SMSF rulings on LRBAs and how did the lender arrive at their decision,” he advised.
“We have now reached a point where the ATO has released new guidance, the SMSF Association has called for members to seek evidence, and where this goes from here, time will tell.”
