Navigating bare trust considerations when paying out an LRBA
When an SMSF pays out a limited recourse borrowing arrangement (LRBA), funds will need to ensure it can take the correct steps in the aftermath, especially around managing the bare trust to ensure a smooth finalisation process.
In a recent update, Cooper Grace Ward partner Scott Hay-Bartlem said that SMSFs having LRBAs would need to make sure they can follow the correct steps to finalise the process of the payout and avoid any compliance issues that the fund may face in the aftermath.
“The first thing you need to do is talk to your bank and get that debt mortgage formally released. It’s something you will need to talk to the bank that did the original borrowing to give you the formal paperwork,” Mr Hay-Bartlem said.
“When you’ve got a super fund borrowing, you’ve got a trust deed that owns the property on behalf of the SMSF trustee. What that means is when you paid out your bare trust, you can transfer the asset out of that bare trust trustee down to the SMSF.
“Now the law says you don’t have to transfer it down, and sometimes we don’t, but you will have to if you’re going to renovate, develop, change the use or any of those sorts of things, and you can’t do that while you’ve got an LRBA in your SMSF.”
When collapsing the bare trust, Mr Hay-Bartlem noted it really involves the transfer where the bare trust trustee transfers the property down to the SMSF trustee.
This will involve a lot of titles, office documents, and SMSFs will also need to check the rules in the bare trustee, so it places the crucial importance of making sure to read the deed.
When considering the best strategy to navigate the consequences of collapsing a bare trust, it can depend as the duty rules are different in every state, according to Mr Hay-Bartlem.
“Pretty much every state now has an exemption for that transfer from the bare trust down to the SMSF, but you need to make sure you can kick off all the boxes and comply with the rules,” he explained.
“Because there’s CGT and GST look-through, they shouldn’t apply when you transfer the asset down provided you got the whole thing right in the beginning because the look-through treatment applies where you’ve got a complying bare trust in the LRBA borrowing arrangement.”
Tony Zhang is a Journalist at SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2020, Tony has covered various publications across the legal, financial and professional services sectors including Lawyers Weekly, Adviser Innovation, ifa and Accountants Daily.