Limited recourse borrowing arrangements (LRBAs) are popular within self-managed super funds to acquire both residential and commercial property using the exception to the general borrowing prohibition within sections 67A & 67B of the SIS Act 1993.
Generally, we are aware that the conditions under which the fund trustee may undertake and maintain a limited-recourse loan are that:
- The loan is applied for the acquisition of a single acquirable asset (SAA) including expenses incurred in connection with the borrowing or acquisition;
- The acquirable asset is held on trust for the fund trustee (by bare trustee);
- The fund trustee has a right to acquire legal ownership for the acquirable asset by making one or more repayments after acquisition; and
- The lender’s rights are only secured against the relevant acquirable asset.
Duty treatment (Victoria)
Typically, an LRBA will have the following characteristics:
- The fund provides all the deposit monies and the balance of the purchase price for the land (the property) from a combination of the fund’s assets and borrowings from a lender (either financial institution or another party, including related individual or entity);
- The fund trustee is the only borrower under the finance agreement;
- A person other than the fund trustee (the custodian) acquires the property using the money provided by the fund, pays duty on the acquisition and is registered as the legal freehold owner on title;
- The custodian executes a declaration/acknowledgement of trust that the custodian holds the property on a fixed trust or bare trust for the fund;
- The custodian grants the Lender a limited recourse mortgage on the terms required by the lender over the property (this may be the ATO’s safe harbour in PCG 2016/5 for related party loans).
- The custodian retains legal title to the property until the borrowing from and mortgage to the lender is fully discharged by the fund trustee and then the unencumbered title is transferred absolutely to the trustee of the fund. NB. SPR 2014/1 does provide an exception for the in-house asset (IHA) rules to apply where the asset is not transferred back to the fund upon repayment of the loan.
The State Revenue Office (SRO) anticipates that any deed or document used to effect an LRBA will be assessed for duty on the following basis:
Initial purchase using LRBA
- The initial purchase of the property by the custodian on behalf of the fund is a dutiable transaction pursuant to section 7(1)(a) of the Duties Act (Vic) 2000 (the ‘Act’). Accordingly, it will attract duty at ad-valorem rates at the time the property is transferred to the custodian.
- Subsequently, the custodian will declare that it is holding the property on trust for the SMSF. In this instance, section 7(1)(b)(i) of the Act charges duty on a declaration of trust relating to the dutiable property, the specification of which forms part of the declaration of trust or part of the transaction constituted by the declaration of trust. Accordingly, in the absence of an exemption, section 7(1)(b)(i) of the Act would apply separately to charge duty on the declaration of trust made by the custodian.
- Section 7(1)(b)(i) will not apply if it can be shown that the custodian is merely holding the property for the fund under a fixed or bare trust. In that case, section 34(1)(a)(i) of the Act will apply to exempt the declaration of trust from duty.
- In order for section 34(1)(a)(i) of the Act to apply, it must be shown that all monies for the purchase of a particular property have been provided by the ‘real purchaser’, as this provides confirmation of the resulting trust relationship between the parties. Here, the specific wording of the bare trust deed is going to be relevant in the SRO making a final determination.
- Alternatively, if the transfer of the property to the custodian and the declaration of trust occurred contemporaneously, section 17 of the Act may apply to exempt the declaration of trust from duty.
Repayment of LRBA and transfer of property to SMSF
- The final step of the arrangement is the ultimate transfer of the property from the custodian to the SMSF, which can occur upon discharge of the borrowings. Depending on the particular facts of the arrangement, there are two possible exemptions which may apply.
- If the Commissioner of State Revenue has applied section 34(1)(a)(i) of the Act to exempt the declaration of trust from duty, then section 34(1)(b) of the Act would apply to the subsequent transfer of the property to the SMSF.
- Alternatively, section 36 of the Act may apply to exempt a subsequent transfer of the property from the custodian to the trustee of the SMSF if evidence is produced which establishes that:
- duty was paid when the property was acquired by the custodian, and
- for the whole period from the time the trust was declared by the custodian to the time when the property was transferred to the trustee of the fund:
- the trustee of the fund was always the only beneficiary, or
- the beneficiaries (who are natural persons) of the fund were always the only beneficiaries of the SMSF.
It is important to note that from 26 November 2018, all declarations of trust over dutiable property, including declarations made by the trustee of a custodian trust (bare trust or holding trust) that holds land on trust for a regulated superannuation fund under a limited recourse borrowing arrangement needs to be lodged with the SRO and stamped. As indicated above, the duty treatment will be exempt (non-dutiable) in circumstances where section 34(1)(a)(i) of the Act applies.
Smarter SMSF provides Limited Recourse Borrowing (LRBA) documentation that includes loan arrangements with a financial institution (i.e. bank) or via related party.
To find out more, visit our LRBA document page, https://smartersmsf.com/documents/limited-recourse-borrowing/