Advisory Board
One of the most common questions I’m asked when a limited recourse borrowing arrangement (LRBA) is paid out is: “Do I need to transfer the property from the bare trust to the SMSF?”
More often than not, my advice is “no”. Clients are usually dissuaded from proceeding with the transfer once they understand 2 key points:
- It may not be technically required under the superannuation legislation; and
- In Queensland, transferring the property to the SMSF could lead to a significantly higher land tax bill.
Why? Because when the SMSF is treated as holding the property directly, land tax thresholds apply across all properties held by the Fund. If the SMSF owns multiple properties in Queensland, the overall tax liability can increase simply because the property has been moved from the bare trust into the Fund. This can result in more tax for no actual compliance benefit.
From a legal and compliance standpoint, the key issue is whether keeping the property in the bare trust gives rise to an in-house asset under the Superannuation Industry (Supervision) Act 1993. Typically, investments in a related trust are treated as in-house assets under section 71, and if that investment exceeds 5% of the fund’s total assets, it constitutes a breach under section 83.
However, there is a specific exemption under section 71(8) for investments that are part of an LRBA. The question, then, is what happens when the LRBA is repaid. Does the exemption continue or does the property suddenly become an in-house asset?
The ATO has addressed this directly in SMSF Practical Ruling 2014/1 (SPR 2014/1). The ruling confirms that the ATO will exercise its discretion to allow the exemption to continue even after the borrowing has been fully repaid. This is also reflected in the ATO’s published guidance on its website here.
So, keeping the property in the bare trust after the LRBA ends does not trigger an in-house asset issue.
That said, there are still valid reasons to consider transferring the property to the SMSF. For instance, if the fund intends to undertake a redevelopment, such as converting a residential property into a commercial one, the replacement asset rules under section 67B become relevant. In that case, holding the property in the SMSF itself may be more appropriate️.
This is one of those situations where the path of least resistance i.e. leaving the property in the bare trust, might actually be the smartest move.
get in touch
As always, contact your SMSF advisor at businessDEPOT to discuss further.
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