ATO to focus on LRBA route to property investment by SMSFs

Property investments by SMSFs through limited recourse borrowing arrangements (LRBAs) could come under increased scrutiny of the tax office this year, says major accounting firm H&R Block.

Last year, the ATO had expressed concern at LRBA loans that were not structured correctly, including incorrect registration of the ownership of property bought under an LRBA. It spoke of increasing its focus on the LRBA route.

Given the growth in the SMSF sector and the increasing popularity of strategies such as LRBAs, H&R Block has tipped that property will remain a top priority for the ATO’s compliance work in the SMSF sector this year.

“I know the ATO always keeps a close eye on property investment and especially LRBAs,” H&R Block's director of tax communications, Mark Chapman told SMSF Adviser.

This particularly applies to related party borrowings which may currently be structured on non-commercial terms, with a June 30 deadline to have these structures rectified, it said.

According to the ATO website, an asset purchased by an SMSF trustee through LRBA is held in a separate trust.

If the loan defaults, the lender's rights are limited to the asset held in the separate trust, but not to assets held in the SMSF.

In 2015, an ATO campaign saw 500 postcodes issued with warnings urging holiday home owners to ensure deductions were not made during periods a property was not available for let.

“With property rental a valuable source of extra income for millions of taxpayers, it can be expected that the ATO will follow up with some targeted reviews and audits this year,” Chapman was quoted as saying.

The “sharing economy” – “driven in part by the high levels of non-compliance amongst those driving for Uber or renting rooms through Airbnb,” would also be an area of scrutiny by the ATO, he said.