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Jean Rey

Mar 10, 2022

Title Search & LRBA

in SMSF Technical Forum

Hi SMSFAAA team,

All the title searches I reviewed in the past included the mortgage under the limited recourse borrowing arrangement and I thought it was compulsory.

However, one of the fund I am auditing has a related party LRBA but it is not included in the title search.

Can you please advise if it has to be included? And if yes, what section of the SISA mention about it?

Thank you in advance.

Yours Sincerely

Jean Rey

2 answers0 replies

Comments (2)

Jean Rey

Mar 18, 2022

Thank you very much.

THE AUDITORS INSTITUTE

Mar 11, 2022

Hi Jean

The SIS legislation does not make it compulsory to have a mortgage registered on the title.

The reference for this issue is PCG 2016/5 - "Income tax - arm's length terms for Limited Recourse Borrowing Arrangements established by self managed superannuation funds".

The PCG at paragraph 7 requires that for the ATO to accept that an LRBA has been established on an arm's length basis that the security on the LRBA is required to be a "registered mortgage over the property" (amongst other requirements).

If the LRBA does not have a registered mortgage the ATO may deem that the LRBA has not been established or maintained on arm's length terms. As a result the income earned from the property, may give rise to NALI (non arm's length income") & be taxed at 45%.

The ATO does advise at:

https://www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-resources/smsf-technical/pcg-2016/5-frequently-asked-questions/

"Must a charge/mortgage be registered where there is a related party loan?

Similar to the above answer, if trustees wish to take advantage of the safe harbour provisions, they must meet all the terms and conditions set out within PCG 2016/5. This includes registering a charge/mortgage or similar security, even in the case of a related party loan.

If there is not a registered charge/mortgage, trustees will need to provide relevant documentation to substantiate the arm’s length nature of the arrangement. This may include documentation relating to a bank or commercial lender’s loan offer to the SMSF for comparison with the loan documentation of the related party."

It would in my view be hard for the trustees to argue that the LRBA has been done on an arm's length basis if there is no security in place. You could also argue that this would be a breach of section 109 that requires investment transactions to be done on an arm's length basis.

Thanks

SMSF AAA