LRBAs and buying property: A guide for self-managed super funds
Self-managed superannuation funds (SMSFs) have long been attracted to property investments, both residential and commercial. However, entering this realm requires careful consideration of the rules and regulations surrounding limited recourse borrowing arrangements (LRBAs).
Heffron, a specialist advice firm for SMSFs headed by Meg Heffron (pictured), has provided a comprehensive guide outlining crucial factors and restrictions for those contemplating property investments through their super funds.
LRBAs serve as the exclusive avenue for SMSFs looking to borrow funds for property acquisitions, the guide explained. The distinguishing feature of an LRBA is that, in the event of default, the lender’s recourse is confined to the asset purchased using the borrowed funds. Other assets within the SMSF are safeguarded from potential claims by the lender.
Key rules governing LRBAs:
- Designated use of borrowed funds: Borrowed money must be used exclusively for property acquisition, including covering associated costs like stamp duty and property maintenance. Prohibited uses include making improvements to the purchased property or leveraging existing assets within the fund.
- Single asset requirement: An LRBA must pertain to a single asset. While exceptions exist for properties with multiple titles connected by a substantial physical object, considerations such as vendor or buyer preference are insufficient to qualify for a single LRBA.
- Property held on trust: The purchased property must be held “on trust,” necessitating a separate legal entity, typically a custodian, as the property’s legal owner. This ensures that the SMSF does not legally own the asset during the LRBA.
- Limited security: Security for the loan is restricted to the property acquired through the LRBA. Guarantees from external parties are allowed, but these parties must waive any rights to pursue other assets of the SMSF.
- Restrictions on property alterations: While minor improvements may be permissible, substantial changes to the property are generally prohibited until the LRBA is repaid and the property’s title is transferred to the SMSF.
Choosing a lender and loan terms
SMSFs have the flexibility to borrow from various entities, including banks or related parties. However, lenders often impose limitations on loan-to-value ratios (LVR) and property types, Heffron explained. Additionally, higher interest rates and specific requirements, such as personal guarantees, may apply. Careful consideration and financial planning are essential, especially when borrowing from related parties.
Setting up or modifying an SMSF to accommodate property investment requires meticulous planning. The fund’s structure, trust deed, and potential changes to comply with LRBA rules, including the appointment of a corporate trustee, must be addressed. Adherence to broader superannuation rules, such as restrictions on buying property from related parties and complying with the sole purpose test, is crucial.
SMSF members intending to make voluntary contributions should be aware that LRBA may impact contribution limits. The outstanding LRBA loan balance affects a member’s total super balance, potentially limiting their non-concessional contributions cap.
Navigating the complexities of LRBA for property investment in SMSFs necessitates professional guidance. Engaging a qualified solicitor specializing in SMSFs and seeking financial advice from a licensed adviser are recommended steps to avoid adverse consequences and ensure informed decision-making.
Investing in property through an SMSF using limited-recourse borrowing arrangements offers opportunities for growth, but strict adherence to rules and regulations is paramount.