Maximise SMSF Borrowing Potential with Cordner Advisory
Understanding the intricacies of SMSF Borrowing and Limited Recourse Borrowing Arrangements (LRBAs) is crucial for anyone looking to leverage their self-managed super funds (SMSFs) for investment, especially in real estate. These strategies, while promising, demand a thorough grasp of superannuation laws and regulations.
At Cordner Advisory, our skilled SMSF accountants excel in navigating these complexities, providing expert guidance to maximise your investment while adhering strictly to legal requirements.
Want to maximise your SMSF borrowing potential and navigate the intricate SMSF landscape with confidence?
Navigating the Complexities of LRBAs
LRBAs are more than just a strategic tool for SMSF investments; they are governed by a network of stringent rules that require meticulous attention. For instance, the fund can only borrow to acquire a 'single acquirable asset', and the asset must be held in a separate trust until the loan is repaid. This could be a direct holding like real estate or a collection of identical assets such as shares.
Understanding and complying with this definition is crucial, and our Gold Coast SMSF accountants work closely with SMSF trustees to ensure their chosen asset meets these criteria without compromising the fund’s compliance status.
Equally important in an LRBA is the holding trust structure, where the asset is held in a separate trust, known as a holding or bare trust. This trust effectively becomes the legal owner of the asset while the loan is outstanding, with the SMSF as the beneficial owner. Setting up and operating this holding trust correctly is critical for compliance with superannuation laws.
The loan terms under an LRBA are another area of complexity. These terms must be carefully crafted to meet 'arm's length' conditions, including market-standard interest rates, loan-to-value ratios, and loan duration. Our team meticulously reviews these terms, advising on structuring the loan to avoid non-compliance risks, such as the implications of the loan being deemed non-arm's length.
Moreover, once an asset is acquired under an LRBA, there are ongoing obligations related to its management and use. This includes adhering to rules regarding improvements to the property, leasing arrangements, and the eventual sale or transfer of the asset.
Navigating the complexities of Limited Recourse Borrowing Arrangements (LRBAs) is a task that demands in-depth knowledge and precision, and it's where the expertise of Cordner Advisory Gold Coast’s SMSF accountants truly shines.
Unsure about maximising SMSF borrowing under FY2023's rules? Connect with Cordner Advisory for expert advice today.
Navigating the Legal Landscape
The legal aspects of SMSF borrowing are intricate. For instance, the holding trust required under section 67A purchases the asset and holds legal ownership until the loan is repaid. The SMSF trustee, while being the beneficial owner, must adhere to the rules regarding the type of trustee for the holding trust, often necessitating a corporate trustee when borrowing from commercial lenders.
Loan Agreements and Compliance
Loan agreements form a critical part of Limited Recourse Borrowing Arrangements (LRBAs), and their compliance with superannuation law cannot be overstated. Whether the lender is a commercial entity or a related party, the terms of the loan must be carefully structured to meet certain standards. This is to ensure that the arrangement is considered at 'arm's length', a term that implies the loan conditions are comparable to what would be expected in the market between unrelated parties.
Commercial Lenders:
When dealing with commercial lenders, the loan agreement typically includes interest rates, loan terms, and repayment schedules that reflect market conditions. However, it's not just about accepting the lender's terms at face value.
At Cordner Advisory Gold Coast, we help our clients review and understand these terms to ensure they align with the fund’s investment strategy and superannuation laws. We pay particular attention to ensuring that the loan terms do not expose the SMSF to excessive financial risk and are structured in a way that supports the fund’s long-term objectives.
Related Party Lenders:
Loan agreements with related party lenders demand even more scrutiny. The terms must mirror what an independent lender would offer to avoid being categorised as non-arm's length income (NALI). Non-compliance in this area can lead to significant tax implications.
The ATO has provided guidance, known as the Safe Harbour Terms, to assist in structuring these kinds of loan agreements. These terms outline the necessary conditions, such as the interest rate, loan-to-value ratio, and repayment schedule, which if adhered to, will generally be considered as meeting the arm's length requirements.
Avoiding NALI:
Non-arm's length income (NALI) issues arise when the terms of the loan are more favourable than what would be available in an arm's length transaction. This could mean lower interest rates, longer loan terms, or more lenient repayment conditions. Such favourable terms can lead to higher superannuation fund earnings, which the ATO could treat as NALI, taxed at the highest marginal rate. Ensuring compliance with the arm's length principle is, therefore, not just a regulatory requirement but also a critical aspect of the fund’s tax strategy.
Cordner Advisory Gold Coast's SMSF accountants can help ensure that your loan terms, whether interest rates or loan-to-value ratios, comply with current superannuation laws.
““Cordner Advisory expertly steers clients through the intricate world of SMSF borrowing and Limited Recourse Borrowing Arrangements, ensuring compliance and maximising investment potential in real estate.””
Purchasing under an LRBA
Purchasing under a Limited Recourse Borrowing Arrangement (LRBA) involves a specialised understanding of what is classified as a 'single acquirable asset.' This concept is essential for SMSF trustees looking to leverage their superannuation funds to make strategic investments, particularly in real estate.
A 'single acquirable asset' under an LRBA typically includes properties that are held on a single legal title. This could be a residential home, a commercial building, or a parcel of land. The key aspect is that the asset should be identifiable and distinct, conforming to the legalities of a single title. The benefit of this structure is its straightforward nature, making it easier to manage within the SMSF's investment portfolio and ensuring compliance with superannuation laws.
In an LRBA, a single acquirable asset isn't always just one property. Sometimes, a group of properties that are connected, like a big commercial complex covering different land titles, can be considered as one single asset. This is due to the fact that these assets are closely linked and separating them would reduce their overall value and functionality.
Additionally, in the realm of securities, investments like shares or units in a trust can also be considered a single acquirable asset under certain conditions. For example, an SMSF might invest in a set of identical shares from the same company, which are treated collectively as one asset due to their homogeneity and equal market value.
Navigating these rules requires careful planning and a deep understanding of both superannuation law and investment strategy. Cordner Advisory Gold Coast provides expert advice and guidance to SMSF trustees on how to structure their investments under an LRBA. This includes assessing whether the intended investment qualifies as a single acquirable asset and ensuring that it fits within the fund's overall investment strategy.
Our role also extends to advising on the various aspects of purchasing under an LRBA, such as setting up a holding trust to hold the legal title of the asset, understanding the loan terms and conditions, and ensuring that all activities related to the asset remain compliant with superannuation laws.
Ready to unlock the potential of SMSF borrowing for your investments? Speak to a Cordner Advisory expert today. Contact us here.
What actions can someone take on a property under an LRBA?
SMSF trustees often struggle with what they can do with a property obtained through an SMSF loan or LRBA. Distinguishing between repairs, maintenance, and improvements is vital, as each category follows specific superannuation regulations for compliance.
Repairs under an LRBA typically involve work that restores the property to its prior condition without changing its character. This could be fixing wear and tear damages or rectifying defects. At Cordner Advisory Gold Coast, we guide our clients in understanding that the cost of such repairs can usually be covered by the funds borrowed under the LRBA, as long as it is in line with the loan agreement terms.
Maintenance involves actions taken to prevent or address deterioration in the property, such as painting, gutter cleaning, or essential upkeep. These tasks are crucial for ensuring the asset continues functioning in its present state and are not intended to enhance its value or capabilities.
Improvements are changes that aim to make the property better in terms of its condition, purpose, or worth. You must carefully make improvements under an LRBA because they might alter the asset's nature, which is not permitted.
Cordner Advisory Gold Coast advises that such improvements should ideally be funded from the SMSF’s cash reserves instead of the borrowed funds, ensuring adherence to the LRBA rules regarding the single acquirable asset.
Want to maximise your SMSF borrowing potential and navigate the intricate SMSF landscape with confidence?
The Role of Cordner Advisory Gold Coast in SMSF Borrowing
As leading SMSF accountants on the Gold Coast, Cordner Advisory offers a comprehensive service that covers every aspect of SMSF borrowing. From initial planning and understanding of what constitutes a single acquirable asset, to the nuances of loan agreements and compliance with superannuation laws, our team ensures that your SMSF borrowing strategy is robust, compliant, and aligned with your financial goals.
What sets Cordner Advisory Gold Coast apart is our commitment to our clients. We don’t just offer advice; we build relationships. Our SMSF accountants on the Gold Coast work closely with you to understand your financial goals and tailor SMSF borrowing strategies to suit your unique needs.
FAQ | SMSF Borrowing potential
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An SMSF, or Self-Managed Super Fund, is a private superannuation fund managed by its members. SMSF borrowing refers to the process of the fund taking a loan under a Limited Recourse Borrowing Arrangement (LRBA) to invest in assets like property. Cordner Advisory Gold Coast specializes in guiding SMSF trustees through this process, ensuring compliance and strategic investment.
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SMSF borrowing allows fund members to invest in larger assets, particularly property, which they might not have been able to afford otherwise. This can lead to higher returns and a more diversified investment portfolio. Cordner Advisory Gold Coast helps clients understand and leverage these benefits effectively.
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Yes, like any financial strategy, SMSF borrowing involves risks such as potential market volatility and the responsibility of loan repayments. Working with experienced SMSF accountants like Cordner Advisory Gold Coast can help mitigate these risks through careful planning and strategy.
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While property is a common investment choice for SMSF borrowing, it's possible to invest in other types of single acquirable assets, depending on the fund's strategy and compliance with superannuation laws. Cordner Advisory Gold Coast can provide specific advice based on your fund's unique situation.
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Cordner Advisory Gold Coast assists in every step of the SMSF borrowing process, from understanding the legal aspects of LRBAs, ensuring compliance with superannuation laws, to strategizing property investments. Our team offers personalized advice tailored to maximize your fund's potential.
