Tax office gives SMSFs a break to leverage assets for a property foothold

The Australian Taxation Office has seen fit to give the industry a new lending approach in the form of an ‘intermediary LRBA’. Picture: iStock
The Australian Taxation Office has seen fit to give the industry a new lending approach in the form of an ‘intermediary LRBA’. Picture: iStock

Despite all the criticism around the existence of borrowing arrangements in self-managed super funds, the Australian Taxation Office has seen fit to give the industry a new lending approach in the form of an “intermediary LRBA” — limited recourse borrowing arrangements are the key tools for SMSFs who wish to gear into the property market.

The tweaked version allows the holding trustee to be the borrower with the super fund guaranteeing the loan to the holding trustee. The usual arrangement up until now (and which continues to also apply) has the super fund borrowing and the holding trustee guaranteeing the loan and providing the property as security.

LRBAs by super funds are the subject of constant criticism by certain sectors of the industry and their political running mates. Labor was intending to abolish them had it won the last election. It was doing so at the request of the industry funds who hate them because they cannot use them. Retail funds have the same view.

Yet LRBAs are one of the reasons for having an SMSF. If you want your fund to invest in direct real estate then LRBAs offer the mechanism for leveraging your fund assets and gaining that sought-after exposure to the property market.

So it has been a surprise for all concerned that far from abolishing LRBAs the ATO has announced this new way of arranging the loans that could actually make it easier to get bank approval for them. Maybe it was the banks who lobbied for the change, because it doesn’t seem that the super industry was pushing for change of this nature. Super’s new loan version came in the form of ATO instrument SPR 2020-21.

Example

Here’s how it might work:

To illustrate how the new intermediary LRBA differs from a typical LRBA, let’s look at David and Amy who are members and trustees of their SMSF which has purchased a property under an LRBA with a corporate holding trustee, DAMY. As the holding trustee, DAMY holds the legal title to the property on bare trust for the fund trustees. DAMY is a newly established non-trading company of which David and Amy are the only directors. David is the sole shareholder of DAMY.

Before the determination, an intermediary LRBA wasn’t allowed as the property would constitute an in-house asset of the fund. The ATO, as the regulator, exercised its statutory power under the Superannuation Industry (Supervision) Act 1993 (SIS Act) to determine that an asset that is held under such arrangement is no longer an in-house asset. The determination was registered on May 19 this year but it is to take effect from the earlier date of September 24, 2007.

In a typical LRBA, David and Amy as the fund trustees would be the borrowers and would have entered into a loan agreement directly with the lender. DAMY as the holding trustee would be registered as the legal owner on title and would guarantee the loan, thereby enabling the lender to take a first registered mortgage over the land held by the holding trustee.

Intermediary LRBA

With an intermediary LRBA, DAMY as the holding trustee will be the principal borrower and give the mortgage over the property to the lender.

The fundamental aspects of the trust would be similar to those of a typical LRBA. However, as the arrangement’s compliance relies on the regulator’s determination SPR 2020-21, David and Amy should ensure that all conditions prescribed in the determination are closely mirrored.

One of the conditions requires DAMY to only have David and Amy as its directors and shareholders. In this example, David is the sole shareholder of the holding trustee. While the wording of the ATO determination may be somewhat ambiguous as to whether it necessarily requires each and every member of the fund to be a shareholder, best practice would be to ensure compliance by having both David and Amy as the two shareholders of the company.

Likewise, the requirements in relation to documenting the holding trust are more prescriptive. In order to ensure that the arrangement can rely on the ATO’s determination as an exception to the in-house asset rule, the holding trust deed must have been carefully drafted and executed as a legally binding deed encompassing all the prescribed conditions in the determination.

Jeff Song is the managing solicitor, superannuation online, at Townsends Lawyers.