Sometimes we encounter an SMSF with members who are non-family business associates. Invariably the fund is holding business real property tenanted by the business. Often such arrangements include a limited recourse borrowing. Where SMSF members/trustees are not family members there is the potential for significant problems in the event of a member’s death. In addition, should the business relationship terminate, exit strategies are problematic. Dealing with a large, lumpy asset can be difficult, even more so when a borrowing is involved.

Often, in such cases, the business associates were, initially, not related parties for the purposes of SIS as they were not in partnership and merely had equal interests in a company or trust trading entity. In this instance the members could have maintained separate SMSFs that invested equally in an unrelated company or trust. Such an entity would need to be uncontrolled by either of them or their SMSFs as evidenced by proper documentation, appropriate equity and behaviour.

The entity could then have borrowed outside of the limited recourse borrowing restraints including obtaining life insurance to cover the debt. In addition, a potential exit strategy that does not exist in a combined fund situation, would be the eligibility for either SMSF to purchase the property from the entity using a limited recourse borrowing at that time subject, of course, to a lender being available.