Structuring key to business purchase using LRBA
While the process has become more complex, SMSF trustees are still able to structure the use of an LRBA to purchase a business real property within their fund such that it will not affect their total super balance, according to Townsends Business and Corporate Lawyers.
In a recent blog post, Townsends senior solicitor Jeff Song said despite new laws adding outstanding LRBA balances to a member’s total super balance if they had borrowed through a related party or reached age 65, the strategy of purchasing business premises using an LRBA was “perhaps not quite as attractive” but “still viable”.
Mr Song gave the example of Bruce, 65, and Linda, 60, who had super balances of $1 million and $500,000, respectively, within their SMSF. Bruce owned a commercial property worth $2 million and wanted to sell this to their SMSF, which the fund would purchase using an LRBA.
“Assuming the property is ‘business real property’ in NSW, the SMSF’s purchase from Bruce may be eligible for stamp duty concession, meaning a potential saving of up to $94,800 on stamp duty,” Mr Song said.
“One of the requirements for this concession is that the purchase is financed by only Bruce’s interest in the SMSF and an LRBA, i.e. Linda’s interest of $500,000 cannot be used towards the purchase.
“If the SMSF uses Bruce’s interest of $1 million and borrows under an LRBA a further $1 million to finance the purchase, any outstanding loan amount as at the next 30 June will count towards Bruce’s TSB as he has reached the age of 65.”
This would make Bruce ineligible to make further contributions to his super; however, if the purchase was structured into two separate transactions for Bruce and Linda, the LRBA would not count towards Bruce’s TSB.
“The SMSF’s purchase is structured into two separate transactions of the purchase by the SMSF of the first 50 per cent of the property to be segregated in the SMSF for the sole benefit of Bruce; and the purchase by the SMSF of the other 50 per cent of the property to be segregated in the SMSF for the sole benefit of Linda,” Mr Song said.
“The first purchase will only use Bruce’s balance [of] approximately $1 million, be segregated in the fund for the sole benefit of Bruce, be eligible for stamp duty concession, be transferred to the fund trustees and be without any use of LRBA, thereby not affecting Bruce’s TSB.
“The second purchase will only use Linda’s balance [of] approximately $500,000 and an LRBA loan, be segregated in the fund for the sole benefit of Linda, not be eligible for stamp duty concession, be transferred to a bare trustee or holding trustee for the SMSF, will not affect Bruce as this 50 per cent secured under the LRBA doesn’t support his super interest, [and] will not affect Linda as she hasn’t satisfied the condition of release.”
However, Mr Song noted such a strategy was complex to implement and would require financial, legal and tax advice as well as negotiation with the lender.