A legal specialist has confirmed retaining a property in a bare trust once a limited recourse borrowing arrangement (LRBA) has been paid back is permitted by law and doing so can provide more optimal outcomes for an SMSF.
“We’ve actually got this instrument [SPR 2014/1] from the ATO that says … when we get to the of the borrowing, we’re not going to breach section 71A [of the Superannuation Industry (Supervision) Act] simply because we don’t transfer [the property from the bare trust to the super fund] at the end [of the LRBA],” Business Depot legal director Neal Dallas explained.
Dallas pointed out many trustees look to have a property transferred out of the bare trust and into the SMSF once an LRBA has been extinguished because they believe it is the simplest course of action, but suggested they do not consider the benefits of the alternative course of action.
“There are some reasons why you wouldn’t do that predominantly around [factors such as] asset protection,” he noted.
“[For example], if we’ve got a client who has got six borrowings that have all come to an end, [they] might still want to have each property in a separate trust. [The benefit of this strategy can be] if a tenant trips over and breaks his neck on Property A, it’s only Property A that is exposed to [any potential liability] claim [and] not any of the other properties [or the assets of the SMSF].”
According to Dallas, certain state-based laws can also make continuing to hold a property in a bare trust at the conclusion of an LRBA advantageous.
“The [other reason for doing so is in regard to a] land tax position, at least in Queensland. So if we’ve got separate trusts, the way the QRO [Queensland Revenue Office] assesses land tax is to look at each trust separately so you get the benefit of the threshold [being available more than once] if you’ve got separate trusts,” he said.
“If [several properties] all go into the one trust, we only get one [application of the] threshold.
“So I think the key takeaway [message] there is you’re not required to collapse [a bare trust] and collapsing it may give you a worse result.”
Accurium head of education Mark Ellem stressed why careful consideration is important.
“At least assess [the situation] first and then you can collapse it [because] if you’ve already collapsed it, you can’t resurrect it,” Ellem advised.
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