Share
Potential Pitfalls while entering into “Limited Recourse Borrowing Arrangement” (LBRA)
 
 
   

Common Mistakes with bare trusts 

News | Mehak Gaba | Released: 19/03/2025 | Read: 3 Mins

SMSFs continue to be a popular choice for those looking to take control of their retirement savings. Among the various investment strategies available, borrowing within an SMSF to purchase asset has become a widely used option. However, SMSF borrowing, while beneficial, comes with its own set of complexities and a range of incorrect assumptions about what these loans entail.

 

In this edition of our newsletter, we highlight common mistakes people make when borrowing through their SMSF and provide tips on how to avoid them.
   

Potential Pitfalls while entering into “Limited Recourse Borrowing Arrangement” (LBRA)
   

  • Failing to review the SMSF Trust Deed: Ensure that the SMSF Trust grants trustees the power to borrow, grant security, and allow assets to be held by custodians or nominees on behalf of the trustee. If these provisions are not included, the trust deed must be amended.

  • Investment Strategy not aligned with Asset Acquisition: The SMSF investment strategy must explicitly allow the acquisition of assets and borrowing for that purpose. If the investment strategy does not accommodate this, it should be amended.

  • Drawdowns to make Capital improvements: Under Section 67A(1)(a)(i) of the SIS Act, borrowing funds to make capital improvements is prohibited. Ensure borrowed funds are used solely to acquire assets, not to improve existing assets.

  • Situation: Sarah uses her SMSF to borrow funds under a LRBA to purchase a rental property. However, she cannot use the borrowed funds to renovate the property, such as upgrading kitchen. In this scenario, the SMSF would have to find alternative funding for the renovations, such as using its own funds or seeking a separate loan that does not fall under the terms of the LRBA.

  •  
  • Using Existing Fund Assets in LRBA: Regulation 13.18AA of the SIS Act specifies the requirements for a valid LRBA arrangement, and that the borrowed money is used to acquire new or replacement assets, not assets already owned by the fund. Using funds for existing assets violates super laws.
         Situation: Sarah, trustee of his SMSF, wants to use LRBA to purchase a property. However, he                     considers using borrowed funds to repurchase the same property his SMSF already owns, which is               not allowed. 
  • Attempting to acquire multiple different assets under a single LRBA arrangement: Under Sections 67A and 67B of the Act, a limited recourse borrowing arrangement (LRBA) applies to the acquisition of a "single acquirable asset. 

         Situation : Sarah intends to acquire shares of the same class in a company through  an  LRBA.                     These shares can be acquired under a single LRBA. However, if Sarah were to acquire different                     classes of shares (e.g., ordinary and preferred shares), separate LRBAs would be required for each               class.

  • Interest rates not commercially justifiable: Ensure that the interest rates charged on an LRBA are consistent with the Practical Compliance Guidelines (PCG) 2016/5 to avoid issues with the Australian Taxation Office (ATO), especially when the lender is a related party. Below are the rates that are considered.
   
Year   Real property     Listed shares or units
  2024-25   9.35% 11.35%  
  2023-24   8.85% 10.85%
  2022-23   5.35%  7.35%
  2021-22   5.10%  7.10%
  2020-21   5.10%   7.10%
  2019–20   5.94%   7.94%
  2018–19   5.80%      7.80%  
  2017–18   5.80%    7.80%
   

 

  • Leading to Double Stamp Duty in Bare Trust Transactions: Double stamp duty can occur if the Bare Trust Deed and contract of sale are signed in the wrong order, leading to duplicate tax obligations.

 

NSW, TAS, and ACT: Sign the purchase contract before the Bare Trust Deed to avoid the Bare trustee being listed as the purchaser.

 

SA, QLD, and NT: Sign the Bare Trust Deed before the purchase contract to ensure the Bare trustee is the legal Custodian.

 

VIC and WA: Both signing orders are generally fine, but it's best to follow recommended practices to avoid complications.

  • Lender’s Recourse Beyond the Acquired Asset: Under Sections 67A and 67B of the SIS Act, an SMSF trustee can borrow only on a limited recourse basis to acquire a “single acquirable asset.” A common mistake is granting lenders the right to recourse beyond the acquired asset. SMSF trustees must ensure that a lender’s rights are strictly limited to the asset purchased under the LRBA. In the case of a default, this would constitute a violation of superannuation laws.
   

Stay aware to avoid this Pitfalls
   

By focusing on these critical areas, you can effectively avoid costly mistakes with Bare Trusts, ensure compliance with SMSF regulations, and prevent unnecessary tax and legal complications. It’s essential to regularly review the trust deed, investment strategy, and LRBA setup, as well as to ensure proper use of funds and timely execution of documents. 

 

Additionally, seeking advice from an SMSF advisor or a conveyancing solicitor can help facilitate smooth transactions and provide expert guidance on navigating complex legal and regulatory matters. Taking these proactive steps will help safeguard the trust's integrity and prevent potential issues down the road.
   

How to Set up Bare Trust through Trustdeed
   

How to Set up Bare Trust through Trustdeed

 

Follow the below given simple instructions:

  1. Login to your Trustdeed account on www.trustdeed.com.au or Click here to Register now.
  2. Go to SMSF borrowing and select the borrowing option.
  • $330 (including GST) for external lending
  • $550 (including GST) for related party lending.

Please follow the link for your reference https://www.trustdeed.com.au/smsf-borrowing-external-party.asp

     3. Fill out the form and receive the necessary documents instantly.
  • Property Custodian Trust Deed.
  • Minutes and related documents such as Investment declaration and Statutory Declaration.
  • Loan agreement (for related party lending only).
  • Limited Recourse Borrowing Information.
   
   
   

 

 

Visit www.trustdeed.com.au for more details or call us on (02) 9684 4199

 

 
   

Follow Us On

 You are receiving this email as you signed up for our newsletters.

 Want to change how you receive these emails?

You can Unsubscribe or Update your preferences
 
click here to unsubscribe from the mailing list
Share