One of the most common and persistent errors related to LRBAs stems from the accuracy or timeliness of the trust deed, said Julie Dolan, chief executive of SMSF Consulting and SMSF Blueprint, at the Chartered Accountants Australia and New Zealand National SMSF Conference in Melbourne this week.
“Any trust deed established prior to July 2007 is unlikely to have the relevant powers required to borrow, grant a charge over an asset or put in place a holding trust,” Ms Dolan said.
Further, Ms Dolan stressed the holding trustee must not be the same as the trustee of the SMSF, as there must be a separation between the legal and the beneficial interests.
She also recommended that clients seek pre-approval of the loan via a broker, so they are fully aware of the lending requirements prior to incurring set-up costs, which can often catch clients by surprise.
In addition, Ms Dolan noted borrowing under section 67A can only be used in the acquisition of a new ‘single acquirable asset’.
“It cannot be used to refinance an existing super fund property or improve/change an existing property held within the super fund,” she said.
Often, clients make the mistake of not clearly understanding the difference between fixtures and chattels on the contract, Ms Dolan added.
“Chattels are not a ‘single acquirable asset’ and cannot be purchased with borrowed funds. This needs to be under a separate contract and funded via existing capital in the fund,” she said.
There are also some important steps that are often missed on the payout of the loan, Ms Dolan said.
“On payout of the loan and transfer of the asset to the SMSF trustee, [make] sure that the holding trust is vested. The holding trust cannot be subsequently used for another property purchase.”