Two senior SMSF specialists have warned practitioners of the compliance risk that can arise from an offset account linked to a limited recourse borrowing arrangement (LRBA) from a non-bank lender.
“A true offset account is absolutely fine. The way an offset account would typically work is where it operates as a separate bank account and you could put, in theory, just less than the loan balance in that account. It’s offsetting the interest and if you go to take that money out again, you’re not redrawing from the original loan,” Accurium technical superannuation adviser Jason Hurst told delegates at SMSF Professionals Day 2025 co-hosted by selfmanagedsuper and Accurium in Sydney last week.
“The issue that we’re seeing is with the banks exiting the LRBA space. The banks were able to maintain these separate deposit accounts because they are authorised deposit-taking institutions (ADI), but for some of these smaller lenders the offset account is a sub-account of the loan. So when you’re taking money out, you’re effectively making a redraw, which is a new borrowing and can cause an issue with the LRBA rules.”
Accurium head of SMSF education Mark Ellem then explained how the offset accounts non-ADIs provide can lead to another dimension of fund compliance breaches.
“As recently as last month I had an inquiry from an accountant where their client was taking out an LRBA from a non-bank lender with an offset account. It looked just like a sub-account where if they redraw, it would have to be applied to the asset under the LRBA per the rules,” Ellem shared.
“The question then arose if the borrower, being the SMSF, defaulted on the loan, what would the lender seize as compensation? The answer was the asset and what is sitting in the offset account. That indicates clearly to me it is not a true offset account.”
He pointed out under the LRBA rules the lender only has rights to the asset acquired under the original loan, meaning it should not have any charge over the money in the offset account.
According to Ellem an offset account offered as part of an LRBA from a non-bank lender can lead to other compliance issues if a withdrawal is made from that facility to acquire another asset for the SMSF.
“If it’s not a true offset account and is a sub-account of the loan, that’s a redraw and all you can do with a redraw is to prepare the property under the LRBA or make improvements such that it doesn’t change the fundamental characteristics of the asset.
“If you go and buy a completely separate asset, you’ve breached the LRBA rules.”
He recommended practitioners have clients looking to use an LRBA offset account provided by a non-bank lender seek legal opinion or ATO specific advice on the arrangement.
The ATO recently updated its guidance on LRBA offset accounts.
If you would like to ask a panel of SMSF experts any questions relating to client scenarios, secure your place at SMSF Professionals Day 2025. Please visit www.accurium.com.au/smsf-professionals-day/ to register.
