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Jun 02, 2023

LRBA on a Block of Land

in SMSF Technical Forum

Hi,

If an SMSF does and LRBA and acquires a commercial block of land, they will not be able to build on it while the loan is in place I o not believe, but could they for example place a portable shed on it like contructions sites have? This is something the tenant would fund, it would basically sit on the land, not be fixed or concreted in and the tenant has the right and expectation to remove it when the lease is up.

Also if you have a situation where a property is purchased 50/50 and the other tenant in common has no loan will the SMSF be able to do an LRBA or does this knock them out? I guess from a SISA perspective it is OK but banks may just want security over the whoel asset and may get tricky with the other party being involved.

Thanks

2 comments

Comments (2)

THE AUDITORS INSTITUTE

Jun 05, 2023

Hi CV

Yes I agree that if a SMSF borrowed via a LRBA to purchase vacant land they could not build on that land (whilst the LRBA is in place) as that would be an improvement that would normally make the land a different asset.

Refer "SMSF 2012/1 SMSF's: LRBA's - application of key concepts" for more details.

Re the 50 / 50 tenants in common & a SMSF having a LRBA I have not come across this before and assume it will be difficult as the lender will want to take security over the whole property.

I expect lenders will not like the arrangement given the legal issues. If other members have experience with this issue please let the forum know.

It may be possible to do it via a related party LRBA. My concern would be does the related party lender meet the safe harbour requirements if it is likely that an unrelated lender would not allow such a loan.

If the SMSF is to consider it further they should get legal advice. I also note that a similar question was raised previously and there was concern that it would not be the purchase of a single acquirable asset & that a private ruling should be obtained.

Thanks

SMSF AAA

Michael Mackenroth

Jun 05, 2023

Replying to

I have come across a process called undivided part title from memory, which basically allows a property to be split in terms of ownership, meaning the LRBA may be able to be secured over the undivided 50% only.

The trustees would need to consult a conveyancer. I doubt a bank would finance it.

Michael