The superannuation system provides several benefits when it comes to as elf-managed superannuation fund(SMSF) owning farmland. These include asset protection and the management of estate planning risk. However the overriding advantage is that it provides a tax-effective environment to help build wealth. In most circumstances a superannuation fund will be taxed at a maximum rate of 15% and in certain instances its income will be tax free.
In circumstances where a SMSF has borrowed to acquire an asset, theoretically there could be 85%–100% of income (after tax) available to pay back the debt. This potentially allows debt to be paid off faster when compared to a ‘non-superannuation’ environment, thereby generating wealth at a superior rate. The downside of such tax-effective conditions are the strict regulations and compliance rules a SMSF faces. The ‘sole purpose test’ is the fundamental doctrine that all superannuation fund trustees must legally comply with.
The sole purpose test imposes a requirement on the trustee to maintain the fund for the primary purpose of providing legal owner of the asset, whilst the SMSF has only a beneficial interest in the asset, up until the loan has been extinguished. During the LRBA any income received from the asset, such as a farm lease, is paid directly to the SMSF. The loan repayments, including interest, are to be made by the SMSF. Once the loan is paid out the SMSF’s trustee has a right to acquire legal ownership of the asset.
If the SMSF defaults on the loan, under a LRBA, the lender’s right to recourse is limited to the asset (under finance) held in the related bare trust. All other fund assets are not exposed to any claim from that lender. Therefore, the retirement benefits of the fund’s members are protected and the sole purpose test is met.