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1/ A SMSF bought a property (the land) under LRBA . The lenders are member of SMSF .
The borrower is company trustee of SF and they did not pay any interest / principal monthly as PCG 2016/5 required from 2020 settlement until now
The loan agreement stated "the Borrower must repay the amount of the loan at the same time as they are to make interest payments under clause 7 over the Term, commencingPCG 2016/5 Safe Harbour on the date 5 years after Settlement" (Clause 7: The Borrower may pay the interest which accrues under clause 6 to the Lender monthly in arrears)
I am wondering if they do not pay interest & principal monthly from the borrowing date so whether this fund meet any breach super law that qualified report
2/ Another case, a member of SMSF 62 years old who retired , can he stop renting and living in the house of SMSF that still owe under LRBA ? If Yes, could you please show me where I find out the rule?
Many thanks
Hi Phuong
Re your first query there is a related party LRBA & interest / loan payments have not been paid since 2000.
I will use example 1 in PCG2016/5 for guidance & it refers to:
Example 1 - real property
19. A complying SMSF borrowed money under an LRBA on terms consistent with section 67A of the SISA. It used the funds to acquire commercial property valued at $500,000 on 1 July 2011.
•The borrower is the SMSF trustee.
•The lender is an SMSF member's father (a related party).
•A holding trust has been established, and the holding trust trustee is the legal owner of the property until the borrowing is repaid.
20. The loan has the following features:
•the total amount borrowed is $500,000
•the SMSF met all the costs associated with purchasing the property from existing fund assets
•the loan is interest free
•the principal is repayable at the end of the term of the loan, but may be repaid earlier if the SMSF chooses to do so
•the term of the loan is 25 years
•the lender's recourse against the SMSF is limited to the rights relating to the property held in the holding trust, and
•the loan agreement is in writing.
21. We do not consider that this LRBA has been established or maintained on arm's length terms. The income earned from the property, which is rented to an unrelated party, may give rise to NALI.
The first issue the Fund has is the income earned from the property may give rise to Non Arms Length Income (NALI) & be taxed at 45% due to the non payment of interest and principal amounts (as required by the safe harbour rules).
From an audit report perspective you may need to issue a financial audit report qualification in relation to the taxation. You may also need to issue a compliance audit report qualification in relation to the non payment of interest / principal:
1) Section 62 of SIS - breach of the sole purpose test.
2) Section 109 of SIS - breach of the rules that require investment transactions made and maintained on an arm's length basis.
In relation to your second query a SMSF cannot rent a residential property to a member as this would normally be a breach of section 82-85 of SIS re the in-house asset rules.
The only exceptions to this would be :
1) if the house was acquired by the SMSF pre 11/8/1999 (& pre the LRBA rules) and has been continually rented to a member,
2) the asset (house) is less than 5% of the Fund's assets,
3) the residential house is used as business real property (an example could be a bed & breakfast business or certain farming properties that meet the rules).
If a member has met a condition of release there is the ability to transfer a Fund property out as an in-specie benefit payment. Once the residential property is transferred out of the Fund the member(s) could live in it. You would need to consider CGT / stamp duty implications of an in-specie benefit payment.
Thanks
SMSF AAA