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I am auditing the fund in which the Superfund sold the property at a value less than its LRBA loan. The loan is from one of the Big four bank.
The Trustees paid the shortfall from the bank account of the superfund (Proceeds from property - Loan).
My understanding is that the shortfall should not be financed through superfund considering it is LRBA loan. The shortfall should be considered as loan to members considering SMSF is not liable to pay the shortfall.
Could you please provide the guidance here.
Hi Umesh
Thanks, I still have not been involved directly in an LRBA shortfall so if any members have seen one their feedback would be appreciated. A similar issue was raised previously so they do occur.
As the loan is a non-recourse loan my view is that the loan payment for the shortfall, if such a guarantee in place would be payable directly by the member's. That is the shortfall money should not be paid to the Fund and it would not be treated as a personal contribution. (This in my view is supported by the ATO commentary noted below on the basis that the loan amount owing is paid after the Fund / bare trust no longer owns the property)
The journal that I would prepare (if I was the trustee / accountant) assuming property cost was $500,000:
Dr LRBA loan $400,000
CR Property $500,000
Dr Capital loss $180,000
Cr Write off of loan $80,000
My view is the write off of loan amount would be offset against the capital loss amount. The tax impact should be reviewed but seems comparable to commercial debt forgiveness.
The ATO has noted the following on their website at:
www.ato.gov.au Limited recourse borrowing arrangements - questions and answersGeneral guidance on our current views about the application of the super law to limited recourse borrowing by self-managed super funds (SMSF).
"Personal guarantees and contributions to the SMSF
If a guarantor makes a payment to the lender under an arrangement where they have foregone their usual rights of indemnity against the principal debtor (the SMSF trustee) for the guarantee, this is a contribution to the SMSF if it satisfies a liability of the SMSF. This might happen, for example, if the guarantor paid the borrowing and the acquirable asset was transferred to the SMSF trustee under the arrangement.
In contrast, there is no contribution if the SMSF trustee has exercised a right to walk away from the arrangement (and has lost the acquirable asset to the lender) and has no further liability, but the lender still exercises a right to call on the guarantee for a shortfall after disposal of the original asset."
I agree that there should be a loan taken up to the members in your example if there was a personal guarantee in place. That is the arm's length decision for the Fund would be to not pay the shortfall and to walk away from the debt (as it is a LRBA) or allow the bank to enforce the personal guarantee.
I would recommend you consider getting a legal review as to whether the trustees actions have complied with SIS. If you can provide more details re if personal guarantees are in place and further details re the transaction I can comment further or run it by a lawyer.
I also note that there would have been nothing stopping the Fund paying down part of the loan (prior to the sale of the asset) but again you would need to consider if this was an arm's length transaction if there were personal guarantees in place.
Thanks
SMSF AAA