Can you refinance a LRBA?
A self-managed super fund (SMSF) can refinance an existing limited recourse borrowing arrangement (LRBA). This is particularly beneficial when banks or other lending institutions offer better terms, especially lower interest rates.
What does refinancing mean for an SMSF Limited Recourse Borrowing Arrangement (LRBA)?
Refinancing a loan is permitted under Section 67A of the SIS Act. It means replacing the original loan contract, either with the same or a new lender, not just modifying its terms. Merely, varying and renegotiating the terms of an existing SMSF loan contract with the same lender does not mean it has been refinanced.
The rules that applied when the original loan was taken still apply, especially important for loans before July 7, 2010, which had more flexible provisions such as acquiring multiple assets, the use of personal guarantees to underwrite the lender’s risk and replacement of an asset. If you refinance an old loan, the new loan must comply with current S67A rules, losing the more generous borrowing arrangements.
What are the requirements to refinance an LRBA?
Any new loan taken out to refinance a LRBA must only replace the original loan and apply to the same underlying asset. It cannot be used to finance improvements or increase the loan amount beyond what is currently owed on the original borrowing apart from the reasonable costs for establishing the new loan which can be included.
The new loan must continue to only support a single acquirable asset and the other SMSF Borrowing Rules.
The title cannot be transferred back to the SMSF trustee but can be transferred to another holding or security trustee.
The limited recourse nature of the loan must be maintained with the lender only having recourse to the specific asset. Limiting recourse to the underlying asset also applies to personal guarantees.
The fund’s trust deed must expressly permit an LRBA and any related refinancing.
If the loan involves a related party, it must be conducted at arm’s length, ideally following ATO “safe harbour” guidelines. If not, you’ll need third-party evidence to support the terms and conditions adopted to meet normal commercial standards.
Why would an SMSF trustee refinance an LRBA?
There are various reasons why an SMSF should consider refinancing a loan. Ongoing fees and higher interest rates should be reviewed especially if the loan has been established for a number of years. The lending market, especially in the SMSF environment, is changing rapidly and new specialist lenders are entering the field with more competitive terms and conditions. Digital offerings are becoming more common place and streamlining the lending market.