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I am auditing a fund that, in the 2022 financial year, acquired business real property from a related party (the member). The fund borrowed money from the member in order to acquire the property, under a very basic loan agreement. No LRBA was established. The property is held directly by the fund/corporate trustee, rather than in a bare/custodian trust. In other words, the fund has purchased a property and borrowed to purchase that property, but has not done so under LRBA terms. I acknowledge that this is a contravention of S.67. What is the best course of action for the fund from here? My view is that the fund should sell the property. Any help will be greatly appreciated, thank you.
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Hi Jason
Yes I agree that as "The fund borrowed money from the member" it appears that there is a breach of section 67A & 67B of SIS that as per the audit report requires:
"The fund must comply with the limited recourse borrowing arrangement rules when
borrowing to purchase single acquirable asset or replacement assets (not listed as an
exception to the borrowing rules)".
Yes on that basis you should report the breach to the trustees in writing, qualify part B of the audit report (assuming it is a material breach) and lodge an ACR (auditor contravention report).
However my view is that the trustees should get legal / professional advice as to whether they have or can structure (or restructure) the purchase to not be in breach of the LRBA rules prior to having to sell the property (assuming they prefer to keep the property). I would also question what was done to transfer the property from the related party to the Fund and was there any legal / professional advice obtained re the transaction.
There may be an option to treat the purchase of the property under an instalment contract in that there is no borrowing by the SMSF.
An artilcle that addresses this issue can be found at:
The Trustees (as per the article) should also refer to:
SMSFR 2009/2 - Self Managed Superannuation Funds: the meaning of 'borrow money' or 'maintain an existing borrowing of money' for the purposes of section 67 of the Superannuation Industry (Supervision) Act 1993
The Trustees if in breach of SIS should also consider contacting the ATO to see what there options are.
Thanks
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