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Compliance & Regulation

Small related-party loan can be LRBA safety net

An SMSF strategy expert has recommended trustees with a limited recourse borrowing arrangement (LRBA) in place set up a small related-party loan as a safety measure to guard against the uncertainty surrounding the current superannuation gearing rules.

Australian SMSF Members Association chairman Grant Abbott said lending institutions, such as the banks, could begin making the conditions of existing LRBAs unfavourable if the ability to gear within SMSFs was banned.

“If borrowing gets closed off, it means now the banks have got a book of SMSF loans running out to maybe 15 or 20 years. It’s only around about an $8.7 billion book and on a $4.7 trillion book of home loan products it’s only just a little pimple,” Abbott said.

“It means they could raise the rates on this smaller book or put in penalty clauses, making it difficult for trustees as they’d be locked into a legacy product.

“For those advisers who have had clients in legacy financial products, you know the fees keep jumping up.”

He said running a small related-party loan within an SMSF alongside a commercial loan would give trustees a potential avenue of escape from legacy products from a refinancing perspective.

The current legislation allowed trustees to refinance an existing LRBA, which they might decide to do for many reasons, such as accessing more favourable loan conditions, he said.

However, he said he feared the grandfathering arrangements that could be implemented if a ban on the use of gearing in an SMSF eventuated might make the refinancing option extremely restrictive.

“When we talk about grandfathering, the refinancing option may be okay, but you may not be able to add a new lender,” he said.

“So for safety’s sake, and I’m just crystal balling here and let’s hope this lasts for the next five or 10 years, I’d run a small related-party loan alongside to provide an existing refinancing option.”

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