Update of LRBA

Getting an Update About Limited Recourse Borrowing Arrangement

Limited Recourse Borrowing Arrangement (LRBA): An provision for the SMSF Trustee borrowing a loan from a third-party lender. This arrangement is useful when the trustee uses those funds for the purchase of a single asset (or collection for identical assets having the same market value) held in trust. The earned returns would be credited to the SMSF trustee.

In the case of the loan default, the lender’s rights get limited to the asset gripped in the separate trust. This implies that there is no recourse to the other assets held in the SMSFs.

What are Things to consider for LRBA?

In case the borrower has an SMSF and is thinking of utilizing limited recourse borrowing arrangements for an investment, he/she needs to consider the right kind of investment for SMSF.

The limited recourse borrowing loans can be presented in various ways. The borrower may be presented about a brochure or product disclosure statement, property warrants, or installment warrants. As with any investment decision, the borrower needs to evaluate what is being offered and its returns. This includes:

  • The lender’s identity and effect of the borrowing rate change.
  • What if the loan is called early?
  • If the loan is sold to another party or if the terms of the loan could be altered?
  • How does investment work?

For the loan fees, they would be shown either as percentage or amount. While setting up a limited recourse borrowing investment is generally costly, the set-up pricing and current interest fees could wipe out probable profits. Sometimes, the lender who can arrange the loan can also receive a commission as per the tenure of the same. This is in addition to the fees and costs that the borrower would be paying for the loan arrangement.

In case the asset is a property that is either leased or rented, the SMSF would have enough money to repay the maintenance costs. Also, the borrower can repay the loans if the property is kept unoccupied for a particular period and no rental money is received in the tenure.

The LRBAs are long-term investments wherein the borrower will be able to maintain the loan payment and costs over that particular term. This arrangement is also applicable in case one of the members decides to retire or take their money or thinks to start the pension benefits. The SMSFs can also hold the asset under the LRBA terms wherein they are paying the pension to one or more members. Furthermore, the trustees also need to ensure that the superfund complies with the minimum pension standards.

What about Trustee Considerations?

The concerned trustees must consider the investment quality and their fund is able to meet all the present and future obligations under the LRBA arrangement. The SMSF trustee (s) could only enter in such an arrangement to maintain consistency with investment strategies and governing rules.

What is the general borrowing prohibition?

The SMSF trustees are limited to borrowing exceptions listed under SISA. In case of the general prohibitions and its applicable conditions, these are listed under SMSFR 2009/2.

What are Amendments to super law applied from 7 July 2010?

The super laws amendments of LRBA under SMSF entered on or after  July 7, 2010, are:

  • Superfund assets are protected efficiently in case of default on borrowing.
  • An asset arrangement is to be replaced only by a different asset in very limited circumstances listed under the law.
  • Superfund trustees are not allowed to borrow for asset improvement.
  • Borrowings are permitted over a single asset or a collection of identical assets only having the same market value.
  • The recourse of the lender or any other person in case of any default on the borrowing is limited to an asset under arrangement against the SMSF trustee is limited to rights relating to the acquirable asset.

Summing Up, LRBA is an arrangement to acquire a few limited sets of an asset with diversified risk and exposure. Further, the rights of the lender are limited to an asset under this arrangement.

 

For more information please contact us on ankit.mehta@ascendum.com.au

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