SMSF trustees using limited recourse borrowing arrangements (LRBA) should avoid trying to cut corners in setting up a trust for the loan, with an SMSF structure expert stating they should set up a dedicated bare trust for each gearing measure.
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Acis SMSF services director Peter Johnson said section 67 of the Superannuation Industry (Supervision) Act requires that an asset purchased via an LRBA be held on trust so the SMSF can acquire a beneficial interest in that asset, but trustees and accountants are still trying to sidestep this rule.
“Something you can’t do is hold an asset on trust for yourself,” Johnson told attendees of a practitioner briefing today.
“Within the last week, I had an accountant ask me: ‘Can we have the same trustee as the trustee of the bare trust as we have for the trustee of the SMSF because you can have the trustee of a family trust be a beneficiary of the family trust?’
“Well, if you do have that arrangement, you’re the only beneficiary and you can’t hold an asset on trust for yourself, so the only entity that legally can’t be the trustee of the bare trust is the SMSF trustee.”
He said given this, the SMSF members in their own capacity can be the trustees of the bare trust as there was no restriction preventing that under the law, but he questioned this is a prudent move.
“There is no such thing as a debt of a trust. So if somebody electrocutes themselves, for example, on the property [under the LRBA], that’s not a debt of the super fund. It’s not a debt of the bare trust. It’s a debt of the bare trustee. So they probably shouldn’t be in that role,” he noted.
“The other answer to that question is, what does a bank want? You can put as many people in as trustees as you like, but the bank is not going to accept that and will want a cleanskin bare trustee company or it won’t lend you the money.
“I have learned over the 11,000 bare trusts that I’ve done, that the golden rule of finance is that the man with the gold makes all the rules.”
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