Deductions associated with Limited Recourse Borrowing Arrangements (LRBAs)

Due to the complex nature of the LRBA arrangement, there are some deliberations in regard to the costs of setting up a LRBA in the SMSF and whether they are deductible to the SMSF.

The ATO has issued a private binding ruling (PBR 1012441308161) that considered this question:

Are the costs associated with the setup of a bare trust and trustee company deductible to the superannuation fund?

As a general rule, costs associated with the property purchase and the loan establishment are considered capital in nature, hence, not immediately deductible but added to the cost base of the asset. However, establishing a LRBA involves additional costs which are distinctive in nature.

The following table summarises the tax treatment for certain costs associated with such a transaction.

ExpensesDeduction
Costs associated with the property purchase (e.g. stamp duty)Such expenses are capital in nature and therefore should be added to the cost base of the asset.
Expenses relating to borrowed money (e.g. mortgage stamp duty, loan application fees, valuation fees)Section 25-25 of ITAA 1997 allows these expenses to be deductible under this provision with the deduction generally spread over the period of the loan or five years, whichever is shorter.
Costs for setting up the limited recourse borrowing (e.g. bare trust establishment costs and setting up a corporate trustee)These expenses are not black hole expenses (sec 40-880 of the ITAA 1997) and not deductible under the five year write-off rule as it does not relate to a business that was or is proposed to be carried on for a taxable purpose. It is a passive investment on behalf of the superannuation fund. The ATO believes the set-up of a holding trust is a requirement as per the SIS Legislation and not the borrowing itself that requires the bare trust.

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DISCLAIMER: This information is an interpretation of rules, regulations and standards. It should not be considered as general or specific advice and neither purports, nor is intended to be advice on any particular matter. No responsibility can be accepted for those who act on the contents of this publication without first obtaining specific advice. Liability limited by a scheme approved under Professional Standards Legislation.