Lyn Formica, head of education and content for Heffron, said in a recent SMSF online webinar that without all relevant documentation on loan arrangements it is difficult for auditors to determine things such as interest rate charges and whether the original loan arrangement was done on an arm’s length basis.
Formica said that even if the property title is verified, transferring property from an SMSF without all the relevant loan documentation can cause compliance issues.
“The first port of call is to try and find the original documentation from the previous auditor, or service provider, even finding unsigned documentation or instructions where the previous administrator had asked for a service provider to draw up documentation,” Formica said.
“That would give supplementary evidence on which a lawyer could prepare a ratification-type document, which is what is going to be needed for an auditor to be able to sign off.”
However, if that is not possible, Formica said the alternative is to pay out that loan.
“If you pay out the loan, it doesn’t make the problem go away, but it does mean that the auditor can at least sign off and lodge a contravention report and say it’s a rectified contravention because the loan has been paid out.”
“By paying out the loan you can remove the borrowing from the superannuation fund, but you will still have a limited recourse borrowing arrangement because the borrowing arrangement is not just borrowing, it’s about whether this asset has been held in that trust as well.”
She said if the loan is paid out, the next concern is to decide where to keep the legal title to the property, which could be either the bare trust or a transfer through to the SMSF.
“There are two options in this situation – do absolutely nothing, pay out the loan, make sure any charge against that asset is removed and leave the legal title to the property inside the bare trust, or pay out the loan, remove any charges against the property, and then the SMSF trustee calls for legal title to be transferred through to the SMSF,” Formica said.
However, if the property title is left inside the bare trust, it means no fundamental changes can be made to that asset.
“Although the debt may have been paid out, the borrowing arrangement is still in place,” she said.
“For option two, calling for the asset to be transferred across to the SMSF trustee, there is also some risk as it will potentially attract stamp duty. In some states and territories, there are stamp duty concessions, which means that there’s no duty or at least a concessional duty payable, but in most cases, you’re going to need to be able to prove a lot of things to get that stamp duty concession.”
These include that the arrangement was properly structured and executed at the outset, which would require a copy of the bare trust deed, a copy of the stamped purchase contract, and proof that the SMSF paid all of the purchase money.
“You would need a settlement statement for the purchase of the property, bank records showing the paying of the deposit, and loan documents,” Formica said.
“And if you don’t have all of those there is a risk that there would be full stamp duty payable when that asset was transferred from the bare trust to the SMSF trustee to get the stamp duty exemption.”
