ATO to monitor high-risk LRBAs within SMSFs


The ATO is focusing on risky Limited Recourse Borrowing Arrangements (LRBAs) and failures in Transfer Balance Account Reporting (TBAR) in SMSFs this year. They have announced plans to contact trustees with high concentration risks in their funds and to crack down on misreporting.

Limited Recourse Borrowing Arrangements:
LRBAs allow a superannuation fund to borrow under strict conditions. The existing population of SMSFs that have entered into LRBAs, potentially on the basis of poor or conflicting advice, is a key area of concern for the ATO and has been rated a medium to high-risk.

In 2017, $42.2 billion of LRBAs accounted for 5.6% of total SMSF assets. The most popular of these assets were property, with approximately 95% of the LRBAs for the purpose of purchasing property. Due to this prevalence, the ATO has concerns about the risk of members’ retirement savings in the event of a property decline. Further areas of concern are due to the fact that 30% of LRBAs are secured with personal guarantees. Consequently, if they are unable to meet the obligations of their LRBA, personal assets of SMSF members are at risk.

Transfer Balance Account Reporting:
TBAR is used to advise the ATO when a transfer balance account event occurs within an SMSF, enabling an individual’s transfer balance cap and total superannuation balance to be recorded and tracked.

The ATO has identified a number of key concerns in TBAR since its commencement in July 2018. One area the ATO will be monitoring is the reporting of capped defined benefit income streams. In 2018, approximately 86% of SMSFs reporting a capped defined benefit stream had failed in their reporting obligations. If the fund has a nil holding requirement, it is still necessary to issue a payment summary to the member and the ATO. These errors identify a lack of awareness among SMSFs of their reporting obligations to the tax office.

Where the ATO identifies these areas of risky LRBAs and inadequate TBARs for SMSF members, they will contact trustees to ensure that they have understood and mitigated these risks. It would benefit trustees to have in place an adequate strategy that deals with the potential risks involved in LRBAs and be aware of their reporting obligations for transfer balance accounts.