Litigation likely with new LRBA structures

Litigation likely with new LRBA structures

Ahead of the 30 June deadline, some SMSF practitioners are taking shortcuts when amending loan documents for clients with LRBAs on non-commercial terms, with any mistakes likely to lead to significant expense and potential legal action.

The ATO confirmed last year it expects trustees to have borrowing arrangements on commercial terms by 30 June this year, and released guidance last month on what constitutes commercial terms.

Speaking to AccountantsDaily's sister publication SMSF Adviser, Verante director Liam Shorte said that some of the SMSF practitioners and trustees in the process of adjusting the terms of these loans are writing up the loan agreement documents themselves, without the assistance of lawyers, and making costly mistakes in the process.

“People are always trying to save dollars by doing things themselves. A loan agreement is a legal document and you need to make sure everything is covered off on it,” said Mr Shorte.

“If you’re going to do it, then do it right. It’s a very large asset, in most cases you’re looking at properties worth over $400,000 and sometimes into the multi-millions – spending a couple of thousand getting it absolutely correct is not a bad idea.”

Some of the common traps with documentation, he said, include incorrect terms being used and failure to include simple requirements such as a step-rate from when the super fund falls behind on super payments.

“The ATO has set a minimum of a two per cent step up rate, so if the rate is 5.75 per cent and the super fund has fallen behind for any reason, well then it needs to be paid at 7.75 per cent,” explained Mr Shorte.

“[SMSF practitioners] need to make sure things like that are in the agreement, and making sure the security has been taken, and that there are no personal guarantees in the loan documentation.”

Given the size of the assets in these loans, Mr Shorte said it will be a significant and expensive issue if it’s not done properly.

“If [anything goes] wrong then trustees will be looking for someone to blame, so everyone involved with the fund should be making sure it’s compliant before 30 June and making sure everything is documented properly,” he said.

Mr Shorte said the trustee’s accountant, adviser, auditor and lawyer should all be working on getting the loan on commercial terms.

“They shouldn’t just be expecting someone to be sorting it all out for them. I am already seeing people pass the buck from accountants to lawyers, and financial planners, trying to get each one to take responsibility for it,” he said.

Litigation likely with new LRBA structures
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