Unlocking the Potential of Limited Recourse Borrowing Arrangements LRBAs for SMSFs
Self-Managed Super Funds SMSFs provide a unique opportunity to take control of your retirement investments. One powerful tool at your disposal is the Limited Recourse Borrowing Arrangement LRBA, which allows your SMSF to acquire high value assets like property. While an LRBA can significantly boost your investment portfolio, it comes with stringent regulations to ensure compliance and mitigate risks. Here's a simple guide to help you understand how LRBAs work and how they can benefit your SMSF strategy.
What is an LRBA
An LRBA is a special exception to the general rule that prohibits borrowing within an SMSF. It allows your SMSF to borrow money to acquire a single, acquirable asset such as real property or shares. Here's how it works:
Separate Holding Trust: The asset is held in a separate holding trust, giving your SMSF beneficial ownership. Limited Recourse: The lender's recourse is limited to the acquired asset, protecting other assets in your fund. Legal Ownership Option: Your SMSF has the option, but not the obligation, to acquire legal ownership of the asset once the loan is repaid.
Key Features of LRBAs
Single Acquirable Asset: This must be a distinctly identifiable asset such as one property or a parcel of shares in the same company. Exceptions include assets held across multiple titles that meet specific legal and physical criteria, like farmland. Holding Trust: The asset is held by a trustee on behalf of the SMSF during the borrowing period. Recourse Limitation: In case of default, the lender can only claim against the acquired asset, safeguarding other SMSF investments.
Establishing an LRBA
- Determine Borrowing Needs: Assess your SMSFs capacity to service the loan, considering cash flow and liquidity.
- Choose the Asset: Confirm the asset complies with SMSF rules and meets the single acquirable asset criteria.
- Secure the Loan: Obtain financing from a financial institution or a related party, ensuring terms are arms length.
- Set Up a Holding Trust: Establish a trust to hold legal ownership of the asset until the loan is repaid.
- Meet Documentation and Compliance Requirements: Ensure all agreements align with SMSF rules and legislative requirements.
Common Considerations and Risks
Cash Flow Management: Your SMSF must have sufficient income, such as rental returns or contributions, to cover loan repayments and fund expenses. Asset Diversification: Investing a large portion of your SMSFs funds in a single asset may reduce diversification and increase risk. Tax Implications: Income generated by the LRBA asset is taxable, but concessional rates may apply if the asset supports a pension phase. Improving and Maintaining Assets: Borrowed funds can be used for repairs but not improvements that change the assets fundamental character. Transfer Balance Cap: Loan repayments using accumulation phase assets may result in transfer balance cap credits for members receiving pension income. NonArms Length Income NALI: Income from related party loans that do not meet commercial terms is taxed at the highest marginal rate. Stamp Duty and GST: Stamp duty may apply when transferring legal ownership to the SMSF, and GST registration may be required for commercial properties.
Alternatives to LRBAs
Unrelated Unit Trusts: SMSFs can invest in unit trusts that borrow to acquire property, provided they meet fixed income and capital payment rules. 13.22C Unit Trusts: A compliant trust structure allowing SMSF co-investment with related parties.
