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Question: I have an LRBA shortfall on a super fund.
FACTS
Loan owed for $400,000 on property. Property sells for $320,000. The $320,000 is applied against the loan leaving a balance of $80,00 still to pay.
Under LRBA arrangements only the asset borrowed for can be used by the smsf as security and able to repay the lender. Normally the lender requires the member to personally repay the shortfall using a personal guarantee.
This means I cannot cash in other assets in the smsf and use that money to pay down the loan.
How do I get the liability of $80,000 off the balance sheet of the smsf fund? I need to remove this from the smsf balance sheet.
Does the member of the fund make a non concessional contribution of $80,000? That the $80,000 is then quarantined and used to pay off the loan. Then when it rolls through the accounts at year end, the loss of the $80,000 is now a decrease in the Members Closing Balance.
I believe the $80,000 coming into the fund cannot be treated as a loan from the member. That the member would be entitled to be repaid. It is not recorded as a loan. Therefore it is a Non Concessional Contribution.
What would be the journal entry I would need to post in the smsf accounts?
Am i wrong in my thinking? Your thoughts will be appreciated.
Hi Campbell
Thanks, I still have not been involved or seen an LRBA shortfall so if any members have seen one there feedback would be appreciated.
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 paid 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 noted the following on their website at:
"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."
Thanks
SMSF AAA