Limited Recourse Borrowing Arrangements (LRBAs) for SMSFs involve two trusts, the SMSF itself and the Property Trustee. Should investors establish companies to perform the role of trustee?
Lawyers can go into a cold sweat over questions like this. Their angst arises from the fact that if Mr Smith holds assets on trust for Mr Smith there really isn’t a trust at all because Mr Smith can’t contract with himself. It’s like guaranteeing to yourself to get home by 11pm on Friday night; there’s no legal contract because there is nobody to sue.
So, lawyers get concerned that if Mr Smith is trustee of an SMSF for Mr Smith’s retirement, there may be no valid trust. However, SMSFs are strictly funds rather than trusts. They are very special funds that are given special tax treatment by the government. Accordingly, it is common to see individuals (ie natural persons) act as trustees of their own SMSF.
There is also no reason why the Property Trustee can’t be an individual. However, it will need to be someone who isn’t the trustee of the SMSF. When individuals are trustees of the SMSF, all members of the fund must be trustees, so this means that the property trustee would need to be some other individual – a relative or trusted friend. It’s also a big ask of a relative or friend to act as Property Trustee.
Given that the cost of setting up and maintaining a company to act as Property Trustee isn’t large, it makes sense to form a company or use an existing, non-trading, family company (not one that is trustee of the SMSF) to act as Property Trustee. If a customer baulks at the cost of setting up a company to act as Property Trustee, perhaps they shouldn’t be getting involved in LRBAs for SMSFs anyway.
Some lenders have special rules about who they require to act as trustee of the SMSF and the Property Trust. Some require both the Property Trustee and the SMSF trustee to be companies, some require one or the other. They usually have good reasons for developing that policy, for reasons that are outside the scope of this update.
It’s therefore a good idea for the SMSF to investigate the lender’s requirements before embarking on a fund investment.