Guide to an LRBA

Table of contents

Introduction

Prior to 2007, the SIS (Superannuation Industry Supervision) Act 1993 prohibited a Self-Managed Superannuation Fund (referred to as a ‘Super Fund’ in this document), from borrowing money to purchase assets.

Amendments to the SIS Act were introduced to allow Super Fund’s to invest in any kind of asset and to borrow, charging those assets so long as there is no recourse for the borrowing against the Super Fund.

New section’s 67A & 67B of the SIS Act permit a Super Fund to borrow money if:

  1. the money borrowed is applied for the purchase of an asset;
  2. the asset is held on trust so that the Super Fund acquires a beneficial interest;
  3. the Super Fund has the right to acquire legal ownership by making payment;
  4. the rights of the lender against the Super Fund for default are limited to the security.

Basic Structure

The Super Fund can only borrow money to purchase an asset if it complies with the following:

  • The Super Fund may select any property, residential or commercial. The purchase must be an ‘arm’s length transaction’ (i.e. the property is purchased from a ‘stranger’). There is an exception for ‘business assets’ (i.e. property leased to a tenant who conducts a business in the property). In this case, the property may be purchased from a ‘related party’ of the Super Fund.
  • The legal title to the property must be held on trust by an independent trustee.
  • The beneficial title to the property will be held by the Super Fund.
  • The lenders recourse will be limited to the property, thereby providing the Super Fund absolute protection for its other assets). Certain lenders will also require a personal guarantee from all members of the Super Fund.
  • All rents will be paid directly to the Super Fund.
  • The Super Fund will make loan repayments to the lender.
  • Super Funds can deal with the property however and whenever they like, in the same way as you can deal with ‘normal’ investment properties (e.g. lease, repair, or sell).
  • The Super Fund can pay out or reduce the mortgage at any time (subject to the terms of the relevant loan).
  • When the mortgage is paid out in full, title to the property may be transferred to the Super Fund by the Property Trustee, or the Property Trustee may continue as registered proprietor.

It is important that the structure clearly complies with all the above requirements. Failure to do so may result in the Super Fund being declared ‘non-compliant’ within the meaning of the SIS Act.

It is also important to adhere to the lenders varying trustee requirements when establishing the legal structure. For example, certain lenders require a corporate trustee for the Super Fund, whilst
the others will allow individual trustees.

How does it all work?

There are several entities that complete the purchase/borrowing structure, the Relationships between the parties
illustrates each including their duties & responsibilities.

Relationship Between the Parties

  1. The super fund appoints a trustee to purchase the property on its behalf
  2. The super fund makes loan repayments to the lender/bank
  3. Rent is paid to the super fund
  4. Bank lends funds to the super fund
  5. The trustee holds the property
  6. The trustee agrees to:
    • transfer the property to the super fund once the loan is repaid
    • offer the property to the bank/lender as security for the loan

The Loan

We can help you understand the various Super Fund lending products available in the market today, typically an SMSF loan will conform to following industry standards (we are familiar with several brokers if you require a referral, please ask if required).

  • It’s an ordinary loan that enables you to purchase residential or commercial property with the Super Fund paying the deposit and any other cost/s, i.e. stamp duty;
  • Complies with the Government Legislation (SIS Act – s67A, 67B);
  • It is a ‘Limited Recourse Loan’, meaning the lender cannot touch any other Super Fund assets other than the property held as security;
  • Loan to Value ratios are available up to 80% for residential and 65% for commercial property purchasers;
  • Up to a maximum 30 year loan term for residential & 15 years for commercial purchasers;

Loan products are restricted by nature and typically limited to:

  • A variable rate loan; or
  • A fixed rate loan, 1-5 years.

What other restrictions are there?

  • It is important to remember that there are loan restrictions associated with this borrowing arrangement, including the ‘type/s’ of security lenders will accept:
  • No construction;
  • No vacant land;
  • No increase in the loan amount post settlement;
  • All Super Fund property purchasers must be on a ‘stand alone’ basis, no other assets inside or outside the Super Fund can be utilised.

Case Study – Residential Property Purchase

Peter is 45 years old and has been thinking about purchasing an investment property for around $450,000, he recently became aware of the changes to the borrowing rules that now permits Super Fund’s to invest in residential property and decided to investigate further.

He met with his financial planner who recommended he weigh up the alternative strategies of a “normal” negatively–geared investment or setting up a Super Fund to purchase the investment. Peter concluded that it would be a great way to generate wealth for his retirement by using his Super Fund to pay the deposit and any other purchasing costs, i.e. stamp duty, bank fees etc.

He was astonished to find that, by utilising a Super Fund to purchase the residential investment property, the total projected Capital Gains Tax savings alone on selling the property at age 65 would amount to $180,416.

“ … the total projected Capital Gains Tax savings alone on selling the
property at age 65 would amount to $180,416”

Assumptions: Purchase price $450,000, Property value increases by 5% pa, Marginal Tax Rate of 38%, Current Taxation & SMSF laws remain unchanged.

Case Study – Commercial Property Purchase

Bob is 62 years old and runs a successful hardware store from a building he bought in 1992 and has now fully paid off. Bob wants to retire and let his son James take over the business. But James can’t get a loan to buy the property because, at a value of $1M, like most people his age James doesn’t
have enough deposit.

Bob, his wife and James have a Super Fund with total assets of $500K. In discussions with his Accountant Bob learns that his super fund can acquire the property using a super fund loan.

The family’s super fund invests in the property by taking out a $650K loan and the Super Fund uses its existing funds for the $350K deposit and other transaction costs. Bob and his wife receive $1M, which they use to top up their super and produce a retirement income stream.

No CGT is payable as the sale was exempt under the small business retirement provisions. Bob and his wife each get a tax deduction for up to $50K of the super contribution and can receive up to $85K p.a. tax–free income.

James’ business pays the same tax deductible rent as previously except now the $75K p.a. goes to the super fund. Bob doesn’t have to worry about selling the business or premises to an outsider and James doesn’t have to worry about being evicted or suffering ‘unfair’ rent increases.

“James’ business pays the same tax deductible rent as previously except
now the $75K p.a. goes to the super fund.”