LRBA property expenses

When an SMSF owns property under a limited recourse borrowing arrangement (LRBA), it’s easy to get tripped up on whose name should appear on the bills.

Legally, the title of the property is in the name of the custodian, but since the super fund is usually the entity paying the property expenses, shouldn’t invoices be issued in the name of the fund?

Because the property is legally owned by the custodian (also called the bare trustee), rates notices, insurance and other similar invoices will often be addressed to that entity. That’s not an error — it reflects the legal title position.

However, the beneficial owner — the super fund — is generally the one responsible for the property’s ongoing costs. The custodian merely holds title on trust for the fund; but it’s the fund who is generally responsible for paying legitimate running expenses and keeping proper records to show this.

This look through treatment also applies if the fund is registered for GST. It’s the SMSF that may be entitled to claim input tax credits on eligible expenses. If a tax invoice is issued to the custodian, it’s treated as being held on behalf of the SMSF, since the custodian only holds the property in trust for the fund.

Of course, before making these outlays the fund trustee should first carefully review the lease agreement. Is it appropriate to recover the running costs from the tenant? Or should the tenant have been issued the invoice in the first place? Not understanding who should be paying for what can lead to super law compliance issues or adverse tax consequences for the fund.

We will be covering these practical issues and more at our Property Masterclass. Register here.