Accounting under Limited Recourse Borrowing arrangements and other considerations

[monalisa]

Hi all

Would like to confirm accounting for limited recourse borrowings, and whether my understanding of how transactions occur practically is correct:

• SMSF needs to pay for the property, so we do not need to get a bare trust bank account set up (i.e. we do not need to show a flow of funds through a bare trust);
  
• SMSF collects the rent and reports rent as assessable income, as it is the beneficial owner;
  
• SMSF makes loan repayments and payments for other holding expenses e.g. council, water rates, insurance etc, R&M;

Based on the above, my understanding is we do not require a tax file number and ABN for the bare trust, with no tax returns to be lodged. Is my understanding correct?

Secondly, as personal guarantees from members are required for borrowing, I was reading that members should also document that even though they are personally guaranteeing the loan, they will have no recourse against the SMSF assets in an event the bank comes to members in case of a default. Did anyone here document this?

I am also thinking of minuting the fact that the the fund has decided to borrow funds.

Lastly, I am wondering if all directors of the SMSF trustee also need to be directors of the trustee for the bare trust?

Many thanks
Mona

 

[coastymike]

mona

your accountant should be advising on all of this including the accounting entries required for instalment warrants under AAS 25.

 

[agent007]

Hi all

Would like to confirm accounting for limited recourse borrowings, and whether my understanding of how transactions occur practically is correct:

• SMSF needs to pay for the property, so we do not need to get a bare trust bank account set up (i.e. we do not need to show a flow of funds through a bare trust);

• 
  
  Correct
  
  

  [*]SMSF collects the rent and reports rent as assessable income, as it is the beneficial owner;

  
  Correct
  
  

  [*]SMSF makes loan repayments and payments for other holding expenses e.g. council, water rates, insurance etc, R&M;

Correct

Based on the above, my understanding is we do not require a tax file number and ABN for the bare trust, with no tax returns to be lodged. Is my understanding correct?

Correct

Secondly, as personal guarantees from members are required for borrowing,

This is not always the case.

Lastly, I am wondering if all directors of the SMSF trustee also need to be directors of the trustee for the bare trust?

I believe that is the case

 

[monalisa]

Thank you

 

[jorgon]

Dear monalisa

I agree with agent007's answers and would add the following:-

The Bare Trustee should not take any active part in the arrangement and should act solely at the direction of the SMSF (this should be clear from the custodian bare trust deed). This is important to avoid becoming potentially liable for income tax or capital gains and to avoid the need to prepare tax returns (ATO Practice Statement Law Administration PS LA 2000/2). It follows that the Bare Trustee should not have a TFN nor an ABN. It also means that the Bare Trustee will not be liable to register for GST if the turnover goes above the GST threshold (ATO GSTR 2008/3).

On the question of the guarantee, it is true that if your fund is borrowing from a bank or financial institution, then the members may be asked to give a guarantee. If this is requested then yes, it is essential that the terms of the guarantee (or a side agreement) limit the recourse of the guarantor against the fund (should the guarantee be triggered and paid by the guarantor) to the investment. In other words, the guarantor must agree not to seek a reimbursement from the fund beyond the value of the investment purchased with the borrowing. Bear in mind that if the member is lending money to the SMSF for the purchase then a guarantee would normally not be given.

On the question of the directors, whilst superannuation law does not require the directors to be the same, as a matter of practicality it is sensible that this is the case. In fact, it is best for the Bare Trustee constitution to provide that this happens automatically when the consents are given.

 

[monalisa]

Dear monalisa

I agree with agent007's answers and would add the following:-

The Bare Trustee should not take any active part in the arrangement and should act solely at the direction of the SMSF (this should be clear from the custodian bare trust deed). This is important to avoid becoming potentially liable for income tax or capital gains and to avoid the need to prepare tax returns (ATO Practice Statement Law Administration PS LA 2000/2). It follows that the Bare Trustee should not have a TFN nor an ABN. It also means that the Bare Trustee will not be liable to register for GST if the turnover goes above the GST threshold (ATO GSTR 2008/3).

On the question of the guarantee, it is true that if your fund is borrowing from a bank or financial institution, then the members may be asked to give a guarantee. If this is requested then yes, it is essential that the terms of the guarantee (or a side agreement) limit the recourse of the guarantor against the fund (should the guarantee be triggered and paid by the guarantor) to the investment. In other words, the guarantor must agree not to seek a reimbursement from the fund beyond the value of the investment purchased with the borrowing. Bear in mind that if the member is lending money to the SMSF for the purchase then a guarantee would normally not be given.

On the question of the directors, whilst superannuation law does not require the directors to be the same, as a matter of practicality it is sensible that this is the case. In fact, it is best for the Bare Trustee constitution to provide that this happens automatically when the consents are given.

Thank you for your detailed response, Jorgon.