What happens to property in a limited recourse borrowing arrangement (LRBA) once repayment of the loan is made?
Friday, 29 July 2016

Can the asset be left in a bare/holding trust?

The short answer to this is yes due to a legislation change around this issue back in April 2014.

Previously, if property is left in a bare/holding trust after the loan is repaid, the arrangement would breach the in-house asset rules according to SIS legislation. This is because in order for an SMSF trustee to borrow under an LRBA, the asset must be held on trust so the trustee acquires a beneficial interest in the asset. Therefore, since the SMSF trustee has an interest in the bare/holding trust, the bare/holding trust can be seen as a related trust and an in-house asset. SMSFs are typically not allowed to have more than 5% of its total assets in in-house assets. The asset must then be transferred from the bare/holding trust to the SMSF trustee which would possibly give rise to another round of stamp duty since the transaction would be a transfer of dutiable property.

To counteract this in-house asset concern and avoid further stamp duty, s71(8) was added as an exception to the in-house asset rules. The ATO released Self Managed Superannuation Funds (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014 confirming that the asset can remain in a bare/holding trust after the loan is repaid and removing the requirement to transfer the asset to the SMSF.

However, if the SMSF trustee still wishes to transfer the asset to the SMSF (to significantly improve or alter the asset for example – see SMSFR 2012/1), they should review the requirements to end the LRBA set out in the bare trust documentation. They would also need to consult a lawyer to have the asset legally transferred to the SMSF which would involve contact with the stamp duties office who may request evidence that all proceeds came from the SMSF. 

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