With Limited Recourse Borrowing Arrangements (LBRAs) all the rage, I thought it might be a good time to detail some of the common problems that arise with these transactions.

LRBAs involve a super fund borrowing money to purchase an asset. While the loan is outstanding, the asset must be held in a holding trust.  Thus far, most assets purchased in this structure involve real estate.

These transactions are surprisingly easy to muck up.  If it is completed incorrectly, it’s actually possible to pay full ad valorem stamp duty on a number of different occasions for the one property purchase.

The most common mistakes involve stamp duty and the order in which various documents have to be executed.

The top five issues involving these transactions are:

1.    The timing of the contract of sale in relation to the holding trust

This varies in each state and territory and depends on where the property is located.

In NSW, Tasmania and the ACT, you must sign the contract of sale before you execute the holding trust.  At a practical level, if you’re going to have a separate company as trustee of the holding trust (and this is considered best practice), then you would need to have that company set up before signing the contract.  Also, you need to leave a period of time – at least one day – after signing the contract of sale before executing the holding trust.

However, in South Australia, Queensland and the NT, you need to execute the holding trust before signing the contract of sale.

In Victoria and WA, it doesn’t matter what order you execute these documents.

2.    The purchaser’s name on the sale contract

In NSW, Victoria, Tasmania, ACT, SA and Queensland, only the name of the holding trustee is put on the contract of sale.

This means there are no references to “as trustee for holding trust” or “as trustee for SMSF” and so on.

Only in Victoria can you purchase the property using the “and/or nominee” provisions.  This isn’t available in any other jurisdiction, so make sure you don’t successfully bid at an auction and seek to change details on the contract once you’ve got around to creating the holding trustee company or your SMSF.

In the NT, the detail on the contract of sale needs to be very specific and very detailed.  (More details can be provided if required).

For WA properties, the contract needs to mention the holding trustee and the SMSF trustee.

3.    Who pays the deposit and when

This must be paid from the SMSF’s bank account. If any other bank account is used, then it’s likely that full ad valorem duty will be payable.  This is the case in every state and territory.

What about deposit bonds?  These are a type of insurance that guarantees the deposit will be paid at settlement.  These can potentially be used but it’ll depend on the wording of the deposit bond and the relationship created.

What about bank guarantees?  (These are sureties provided by a bank to a third party.)  Some of these appear to be acceptable but it again comes down the wording and the relationship created.

For both deposit bonds and bank guarantees, you should get good advice from an experienced superannuation solicitor.

4.    What can be included in the contract?

Under the super laws, you can only purchase a single asset.  Chattels in a property’s sale contract are separate assets, so you need to be careful here. Always check with your conveyancing lawyer what is considered to be a permanent fixture (and therefore acceptable) and what is a chattel (and therefore not allowed).  Any chattels included in the contract will have to be removed before settlement.

5.    Purchasing property developments off the plan

In NSW, Victoria, Tasmania, the ACT and WA, you need to sign the contract of sale before executing the holding trust deed.  This means you need to draft the title particulars used for the contract but not the holding trust deed.  The best approach is to sign the holding trust after the final title particulars are issued just prior to settlement.

In SA, Queensland and the NT, you sign the holding trust deed before the contract.  This means the final title particulars aren’t known when the holding trust is executed.  At a practical level, the only way around this is to attach a copy of the contract to the holding trust deed.

The description of the property on the holding trust is very important because the stamped holding trust deed is used to apply for concessional stamp duty when the loan has been repaid and the property is transferred back to the super fund.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.