Limited recourse borrowing arrangements and developing real property
Estate Planning Update – Spring 2013
An asset subject to a limited recourse borrowing arrangement (LRBA) cannot be substantially altered/improved to the point that it constitutes a different or replacement asset – SMSFR 2012/1, paras 33 and 34.
SMSF trustees planning to develop a property are hamstrung by this requirement. However, SMSF trustees are permitted to use a LRBA structure to invest in a related company or trust and, if this entity satisfies the requirement of reg 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (Cth)(SISR) then the investment will not be counted towards the fund’s in-house assets.
A regulation 13.22C trust has numerous requirements (detailed in reg 13.22D). However, it is essentially a trust without gearing that solely owns property and bank accounts. It cannot borrow money, or lend money, or own shares or units in another entity. Nor can it lease assets to related parties (unless the asset is business real property), or conduct a business.
Given that a reg 13.22C trust cannot conduct a business (lest it sacrifice its in-house asset exempted status), the trust should take a passive role in any development activities.
To assist in funding the land purchase, related parties of the members may own some of the units in the reg 13.22C trust and the SMSF can own the balance. The SMSF can acquire further units in the trust even from related parties (providing at market value). However, transfer duty costs should be considered.
When implementing this strategy, SMSF trustees need to be diligent in ensuring that the trust continues to satisfy the requirements of reg 13.22D SISR – failure to do so will result in the trust permanently being treated as an in-house asset of the fund which could pose serious compliance issues.