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  • Holding trust

    The super law does not specify the type of trust that must be used as a holding trust in an LRBA. The law specifies only that the SMSF trustee must have a beneficial interest in the asset being held in the holding trust and the right to acquire legal ownership of that asset after making one or more payments. In addition, for the special in-house asset rule to apply, the asset must be the only property of the holding trust.

    More complex trusts are unlikely to satisfy the requirement that the SMSF trustee has the necessary interest in a particular asset of the holding trust. For example, a discretionary trust could not be used, nor could the SMSF trustee be one of a number of unit holders in a unit trust.

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    COVID-19 limited recourse borrowing arrangement relief

    We understand that temporary repayment relief may be offered in relation to an existing LRBA between an SMSF and a lender (which can be a related or unrelated party) due to the financial effects of COVID-19.

    If the repayment relief reflects similar terms to what commercial banks are currently offering for real estate investment loans as a result of COVID-19, we will accept the parties are dealing at arm’s length and the NALI provisions do not apply. For example, these terms currently include temporary repayment deferrals for most businesses of up to 6 months, with unpaid interest being capitalised on the loan.

    The parties to the arrangement must document the changes in terms to the loan agreement and the reasons why those terms have changed. It is also expected that there is evidence that interest continues to accrue on the loan and that the SMSF trustee will repay any deferred principal and interest repayments in accordance with the varied terms.

    Any further repayment relief needed due to the continued effects of COVID-19 should be reviewed at the end of the agreed deferral period and remain in line with what the commercial banks are offering at that time.

    Where the terms of the loan contract are varied to require interest to be capitalised on the loan and repayments to be made over an extended loan term as described above, we will accept that these variations to the loan contract do not amount to a rescission or replacement of the original contract, or that there are fundamental changes to the character of the loan such that a new borrowing arises.

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      Last modified: 09 Sep 2020QC 20439