What an SMSF should do after paying out an LRBA loan

Upon completion of the repayment of a loan utilised for a limited recourse borrowing arrangement (LRBA) within a self managed superannuation fund (SMSF), a key decision faces each SMSF trustee:

• does the bare trustee transfer the property back to the SMSF trustee; or
• does the bare-trustee continue to hold the legal title to the property?

This decision can result in significant administrative and financial issues and this article covers some important considerations.

Firstly, even though the legal title to a property under an LRBA remains in the bare trustee’s name (otherwise known as a custodian), beneficial ownership of the property rests with the SMSF . The SMSF continues to collect any rent and pays for expenses and reflects any net rental income in its tax return each financial year, regardless of the decision made.

Secondly, transferring the legal title to the SMSF trustee can assist SMSF trustees to streamline their SMSF’s legal framework especially if they wish to undertake an in-specie payment to a member later on by way of transfer of the legal title.

Thirdly, if the decision is made to transfer the legal title to the SMSF trustee, adherence to a structured process is essential. Furthermore, it is important to document each step — SMSF trustees having the responsibility to retain trustee resolutions for a minimum of 10 years.

Key steps in the LRBA windup include:

1. Seeking expert advice:

Seek guidance from both property and SMSF legal advisers. Failure to complete requisite steps and documentation may result in additional costs and complications during the transfer and the usual annual SMSF audit process.

Specific areas where advice is critical include:

• Property law advice for potential stamp duty exemptions (these may not be straight forward and vary between states and territories). If there is no duty concession or the transfer is likely to invoke duty, this may be a reason for the title remaining in the SMSF trustee’s name.
• SMSF legal advice on the impact of the transfer and documentation requirements, as these factors will depend on the governing rules and the bare trust agreement of the individual fund. There may also be superannuation law considerations to be made and specific documents to be drafted.

2. Confirming the complete repayment of the loan:

The SMSF trustee should obtain written confirmation from the lender that the loan has been fully repaid and the mortgage has been discharged.

3. Transferring the title:

The SMSF trustee should initiate the transfer of the title into the SMSF trustee’s name according to the laws in the relevant state or territory. Given the complexity that can arise in relation to these transfers, we recommend that a property lawyer be engaged in the relevant jurisdiction rather than a conveyancer who may not be experienced with the type of issues that can arise in these type of transactions.

4. Documenting the cessation of the bare trust arrangement:

Documentation should be prepared by an SMSF lawyer that records the cessation of the bare trust and any related SMSF change.

5. Notifying relevant parties of the change in the title:

The property lawyer is likely to notify some relevant parties, eg, the state revenue office and local council of the change of title. However, advisers and other interested parties should be notified of the change in title and the impact on the legal relationships including any change to power, water and other suppliers’ services to reflect the change of title, particularly for leased investment properties.

The tenant should already be paying rent direct to the SMSF trustee or its nominated agent. However, the property lawyer should be asked to advise what is required to change the landlord from the bare trustee to the SMSF trustee under the relevant state or territory laws. A legal document assigning the lease to the new landlord and any related document might be needed.

6. Disbanding the bare trustee:

If a bare trustee company was established solely to hold the legal title to the property, the directors of the bare trustee company may consider liquidating or deregistering the bare trustee company. However, they should exercise caution to avoid premature liquidation or deregistration, as it can be complex to reinstate a company if it is subsequently required. We generally recommend liquidation over deregistration for greater certainty to minimise any future risks.

Conclusions

Navigating the transfer of a property from a bare trustee to SMSF trustee involves careful planning and adherence to the correct steps. Careful execution of these steps ensures a smoother transfer and compliance with regulatory obligations. Contraventions can give rise to significant penalties, so it is important to seek expert input and plan ahead carefully.

Related articles

• LRBA Wind Up Documentation
• Related party LRBA variations and PCG 2016/5
• SMSFs, LRBAs and NALI
• LRBAs — current tips and traps
• LRBA Wind Up Documentation

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Daniel Butler, Director ([email protected]) and Cassandra Hurley, Lawyer ([email protected]).

6 February 2024