SMSF borrowing – what happens when the loan is repaid?

Many self-managed superannuation funds (SMSFs) will have properties which were purchased using borrowed funds secured by a mortgage over the property. The funds may have been provided by a traditional bank, or by a related entity. 

This scenario is known as a limited recourse borrowing arrangement, or LRBA.

LRBA structures

Under the SMSF laws, properties subject to an LRBA must be kept separate from the other assets of the SMSF. In a practical sense, this means that the title to the property is registered in the name of a single-purpose “custodian trustee” which holds the property on bare trust for the SMSF trustee.

The property title is mortgaged to the lender, and held by the lender as security until such time as the LRBA loan is repaid.

Ending an LRBA

When the LRBA loan has been repaid, the property should be transferred back to the SMSF trustee, where it can be dealt with as an asset of the fund. At that point, the custodian trustee (unless it is a professional trustee company affiliated with a bank) can then be deregistered.

However, the reality is that many LRBA properties are left in the name of the custodian trustee long after the original borrowing has been repaid, often due to confusion over the processes involved in formally ending the LRBA. This causes unnecessary costs in the ongoing administration of the custodian trustee, and can also complicate matters if the SMSF wishes to sell the property.

Here we demystify the process of ending an LRBA with a simple overview of the steps involved, and some tips to avoid common traps.

Step 1 – Discharge the mortgage

Once the LRBA loan has been repaid, the lender should register a discharge of mortgage on the property title. 

Key tip:  Be aware that commercial lenders often won’t bother with this step unless a discharge of mortgage is specifically requested by the customer.

Step 2 – Transfer the property title

Once the mortgage has been discharged, the property title can then be transferred to the SMSF trustee.

If the LRBA has been set up correctly, this transfer should be exempt from duty – to obtain an exemption, an application for exemption under the relevant section of the Duties Act 2000 will need to be lodged with the State Revenue Office. The first step in the transfer process should always be to check entitlement for the duty exemption, which usually involves reviewing the documentation from the original LRBA and financial statements for the SMSF.

The land tax assessments for the property should also be reviewed to ensure that the property is being assessed correctly in the ownership of the SMSF, and avoid setting off any unexpected landmines in that regard when the transfer is completed.

Key tip:  Engage an experienced lawyer who is familiar with the particular conveyancing steps involved in an LRBA transfer, including familiarity with the specific duty exemption application process which applies to these transfers.

Step 3 – Notify rating authorities of the change of ownership

The local council, water authority and SRO Land Tax Department must be notified once the property has been transferred, so as to ensure that it is assessed in the SMSF trustee’s name going forward. This will be handled by the lawyer managing the transaction.

The SMSF will also need to consider whether it is necessary to notify its insurer, utility suppliers, and any tenant of the property.

Key tip:  Notifying relevant authorities and stakeholders of the change of registered ownership minimises the chances of future complications.

Step 4 – Deregistration of the custodian trustee

Sometimes, the property title will have been registered in the name of a professional custodian trustee operated by the lending bank.  In those cases, Step 4 is not necessary.

However, in most cases a special purpose company will have been established to hold the property, and the title will be registered in that company’s name. Once the property is transferred to the SMSF trustee, that special purpose company should then be deregistered, unless it is intended to be repurposed. The deregistration process can usually be handled by a lawyer or an accountant.

Key tip:  Save ongoing registration fees and accounting costs by deregistering the custodian trustee once the property is transferred out of that company. 

How we can help

If your SMSF has recently paid out a loan on a property and you need assistance navigating the process for formally ending the LRBA, the team at Moores would be delighted to help – please get in touch with us using the details below.

Contact us

Please contact us for more detailed and tailored help.

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^{Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.}