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Gino Coiera

Jun 15, 2022

Loan LRBA

in SMSF Technical Forum

Hi Team,

I have a situation which may become more common with the recent activity in "off the plan" property purchases and latest substantial increase in property values.

The case to hand is:

2 years ago an SMSF executed a property Contract for Purchase with a purchase price of $450,000 and it has approval of an LRBA of $360,000, ie. 80% borrowing. The property is now valued at $700,000. On the increased value, the Bank is now able/willing to increase the Loan (based on same LVR of 80%) to $560,000. Obviously, the increase in the amount borrowed will result in a exess of Funds, which the Trustee intends to utilise for the purchase of other assets ie. shares or another property. My feeling is that as the entire LRBA will not be fully utilied for the original asset as intended, there is a breech however not sure of the SIS section applying to the breech. Another option the lending Bank is willing to entertain would be to simply increase the borrowing to a level which would result in the entire LRBA being used on the purchase without any equity by the Fund. The LVR would be 100% of the contracted purchhase price but 64% based on the increased value of the property under purchase.

The Accountant for the Fund has approached me for my advice but I'm not 100% comfortable with either of the options, but unsure what Section would be breeached.

Your guidance is apprecaited.

1 answer0 replies

Comments (1)

THE AUDITORS INSTITUTE

Jun 16, 2022

Hi Gino

My view is that a SMSF cannot borrow an amount that is more than the cost of the asset. The cost of the asset includes stamp duty and loan costs.

This is supported by SIS section 67A as it states:

"Subsection 67(1) does not prohibit a trustee of a regulated superannuation fund (the RSF trustee ) from borrowing money, or maintaining a borrowing of money, under an arrangement under which:

(a) the money is or has been applied for the acquisition of a single acquirable asset, including:

(i) expenses incurred in connection with the borrowing or acquisition, or in maintaining or repairing the acquirable asset (but not expenses incurred in improving the acquirable asset); and

Example: Conveyancing fees, stamp duty, brokerage or loan establishment costs."

That is if the SMSF borrowed more than the cost of the asset then money has been borrowed not just for the acquisition of a single acquirable asset (& this would be a breach of SIS).

Thanks

SMSF AAA