Home / SMSFs / SMSF investing / SMSFs and property / SMSF property loan paid off? What next?

SMSF property loan paid off? What next?

If you are an SMSF trustee who has borrowed money through your fund to acquire an asset, then you may be wondering what happens when that loan is paid off. And you are not alone.

Over 10% of all SMSFs have used a limited recourse borrowing arrangement (LRBA) at some stage, and many of these loans are now coming to an end.

Background to LRBAs

The limited recourse borrowing rules allow an SMSF to borrow money to purchase a ‘single acquirable asset’ that is held on trust for the SMSF.

The trustee of the holding trust is the legal owner of the asset and the SMSF trustee is the beneficial owner.

Once the loan has been repaid in full, the SMSF trustees have a right to acquire the legal ownership of the asset.

SMSF investing

Free eBook

SMSF investing essentials

Learn the essential facts about the SMSF investment rules, how to create an investment strategy (including templates) and how to give your strategy a healthcheck.

"*" indicates required fields

First name*
This field is for validation purposes and should be left unchanged.

Changes affecting LRBAs

Significant changes were made to the arm’s-length borrowing rules relevant for SMSF loans in 2016, including the introduction of a maximum term for the loan.

As a result of these changes, we are starting to see an increase in the number of these LRBAs coming to an end, with the SMSF having repaid the relevant loan.

When this occurs, SMSF trustees will need to consider what they can, or what they need to do once the loan is extinguished.

Good to know

The arm’s-length borrowing rules impose a maximum loan term of 15 years for property and seven years for stock exchange-listed shares or units. This time frame is assessed from the commencement of the loan even if that was pre-2016. Where a LRBA is refinanced, the combined length of both the initial and refinanced loan cannot exceed the maximum term allowed.

.

Does the ownership of the asset have to be transferred?

The LRBA rules do not compel the SMSF trustees to acquire the legal ownership of the asset once the loan has been repaid in full. The rules set out that the borrowing arrangement must “allow” this to occur at the end of the loan, but the rules do not specifically require it to take place.

In fact, the asset held on trust for the SMSF trustee can remain held that way well beyond the term of the loan that was used to acquire the asset, so long as all the relevant paperwork allows this.

However, trustees need to keep in mind the restrictions on making changes or improving the asset while the asset remains subject to a borrowing arrangement. No changes or improvements are allowed to the asset where it results in a fundamental change to the asset, or the use of the asset, while the asset remains held on trust for the SMSF.

For instance, if an LRBA was used to acquire a vacant block of land, then the SMSF can’t build a structure on that land as it would fundamentally change the asset.

The same would apply where an SMSF has borrowed to acquire a property that they would now like to subdivide. This would not be allowed while the asset remains held under a borrowing arrangement as the fundamental nature of the asset has changed, from a single title to multiple titles.

Where the loan is repaid and the asset is legally transferred into the SMSF trustees name, then all those restrictions are removed.

Important

Make sure you review all the paperwork relating to your fund’s borrowing arrangement and look for any specific requirements that may exist. You should also check your SMSF trust deed for the same.

You will almost certainly need professional legal advice in the transfer process.

You may also need to seek legal and tax advice where the initial structuring of the fund’s borrowing arrangement was not done correctly.

Options after the loan has been repaid

SMSF trustees would usually choose one of the following options once the SMSF limited recourse loan has been repaid:

1. Transfer the asset into the SMSF

Transferring the legal ownership of the asset to the SMSF trustee simplifies the overall property ownership. However, you will need professional legal assistance in the process as the title of the property needs to be legally changed using the relevant State or Territory based procedures.

If the arrangement was initially set up in accordance with those State or Territory based requirements, then the transfer should not trigger full stamp duty. Stamp duty concessions or exemptions should apply.

Super knowledge is a super power

SuperGuide newsletter

"*" indicates required fields

Get super and retirement planning tips and strategies with our free monthly newsletter.

First name*

Once the transfer has taken place, the ‘holding (bare) trust arrangement’ ends.

The SMSF trustees should check for any formal wind up or documentation requirement.

In all cases, the SMSF trustees should create a trustee minute that covers their decision to end the holding trust arrangement.

2. Arrange for the sale of the asset

If you are considering selling the asset that is held on trust for your SMSF in a relatively short period of time, you could consider leaving the asset held as is until that sale occurs.

This would eliminate the costs incurred in transferring the asset into the name of the SMSF trustee.

For the sale to take place, the SMSF trustees would usually need to give a written directive to the holding trust trustee to sell the asset.

Make sure you discuss this with your legal professional.

3. Leave the asset within the holding trust

The third option is to do nothing. The legal ownership of the asset remains as is, with the trustee of the holding trust, and the beneficial ownership of the asset remains with the SMSF trustee.

This option is often used when there may be some doubt or uncertainty around the initial establishment of the borrowing arrangement and if it was carried out in accordance with the requirements of the relevant jurisdiction.

If the correct establishment process was not carried out appropriately, then there may be full stamp duty levied on any transfer of the asset to the SMSF trustee.

Keep in mind the restrictions on making changes to the asset that will always apply while it remains held on trust, as mentioned earlier.

It is also worth noting that the in-house asset exemption that is given to these holding (bare) trust arrangements continues even after the loan has been repaid.

Read more about in-house assets.

Access independent expert SMSF guidance

Make the most of your SMSF with a SuperGuide membership
  • Experts detail SMSF specific strategies
  • SMSF checklists simplify admin and compliance
  • Comprehensive SMSF rules in plain language
  • Newsletters and webinars keep you on top of the current rules
  • Interactive tools and calculators give you power to plan
  • Step-by-step guides help you put plans into action

Find out more


About the author

Related topics, ,

IMPORTANT: All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether any information on SuperGuide is appropriate to you before acting on it. If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Learn more

© Copyright SuperGuide 2008-25. Copyright for this guide belongs to SuperGuide Pty Ltd, and cannot be reproduced without express and specific consent. Learn more

Leave a Reply