A superannuation legal specialist has identified limited recourse borrowing arrangements (LRBA) tend to breach the super laws that allow for their use inside an SMSF because of basic and common problems with key documentation.
SuperCentral superannuation special counsel Michael Hallinan said a critical component of the acquisition of property using an LRBA is a bare trust holds that asset for the benefit of an SMSF for the duration of the loan and it is this requirement that can create problems for trustees.
“Although there is no specific requirement under the superannuation laws or trust law that the [bare] trust be expressed in writing, the exception [in section 67A of the Superannuation Industry (Supervision) Act] requires the trustee of the superannuation fund to have a right to request that the bare trustee transfers the property to the fund,” Hallinan said.
“In the absence of a document stating so, it may be difficult to convince an auditor or the ATO that such a right exists and all of the requirements of the exception are met.
“If all the requirements are not met, the superannuation fund will have committed a breach of the borrowing rules,” he said, adding the absence of LRBA documentation would result in full stamp duty being applied to the value of any property transferred from the bare trustee to the SMSF trustee.
Stamp duty issues would also arise if LRBA documents were incomplete, which can result from a bare trust deed being signed before the details of the property are added, and this oversight means the deed does not identify which property is being held on trust for the SMSF, he noted.
“This generally results in the document being assessed differently by the local duties authority than if the property was identified,” he said.
“Stamp duty would still be nominal, but the organisational and long-term planning skills of the trustee would be put to the test. In fact, it is important the trustee retains particular documents until the loan is repaid to ensure an eventual transfer of the property to the superannuation fund is also only liable for nominal stamp duty.”
Where documents are completed correctly, he noted they must be signed in the correct order.
“While this issue is more relevant in terms of stamp duty than compliance, it remains significant because the order in which the documents have been signed will determine the amount of duty the SMSF will pay in this transaction,” he said.
“In the worst-case scenario, the fund may end up paying three lots of full stamp duty: once on the contract of sale, once on the declaration of trust and once on the transfer from the bare trust to the superannuation fund once the loan is repaid.”
