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Is there an obligation to transfer a property subject to a LRBA into the name of the trustee for the SMSF after the loan has been settled? There is a bare trust arrangement with a corporate trustee in whose name the property is registered. The bare trust deed states the the "the property may be transferred" once the loan is paid off. Secondly, if the transfer is not done and the property remains in the name of the trustee for the bare trust, does this contravene SISA or SISR as the it will not be in the name of the SMSF? Thirdly, if the property is not transferred, does it remain subject to all the LRBA rules such as limitations for any improvements to the property?
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Hi Ron
Yes there is no obligation to transfer the asset from the bare trust to the trustee of the SMSF once the loan has been repaid & this will not breach SIS (subject to my comments below). Yes if the property is to be significantly altered then this may require the property being transferred from the bare trust to the trustee of the SMSF (as in effect it will still be subject to the LRBA rules).
Section 71(1)(f) states that an asset is not an in-house asset if the ATO determines this by a legislative instrument.
The ATO issued SPR 2014/1"Self-Managed Superannuation Funds (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014" to address the issue that you have raised.
This legislative instrument states:
"17. Subsection 71(8) provides an exception to the definition of 'in-house asset' that is particularly relevant to an SMSF's investment in the holding trust as part of an LRBA. That subsection provides that if, at a time:
•an asset (the investment asset) of a superannuation fund is an investment in a related trust of the fund; and
•the related trust is one described in paragraph 67A(1)(b) in connection with a borrowing, by the trustee of the fund, that is covered by subsection 67A(1) [1]; and
•the only property of the related trust is the acquirable asset mentioned in paragraph 67A(1)(b)[2],
the investment asset is an in-house asset of the fund at the time only if the acquirable asset would be an in-house asset of the fund if it were an asset of the fund at the time."
The instrument goes onto state at paragraph 32 "The asset may continue to be held in the holding trust after the borrowing referred to in paragraph 71(8)(b) has been repaid. "
There are differing views as to whether the asset can be significantly altered once the loan has been repaid and the property remains in the bare trust. If the asset is to be significantly altered the trustee should consider getting legal advice and transferring the asset from the bare trust to it (if required).
Thanks
SMSF AAA