Treasury has just released draft legislation that will provide some clarity to limited recourse borrowing arrangements (LRBAs), with one industry lawyer labelling the changes a “positive” move for SMSFs.
DBA Lawyers’ director Bryce Figot explained for a trustee of a superannuation fund to be allowed to borrow, the asset must be held on trust for the trustee of the superannuation fund.
“Accordingly, the legal owner of [the] asset might be one entity, and that entity executes a deed confirming that it owns the asset as a trustee for the trustee of the superannuation fund. In other words, the asset is not actually registered in the name of the trustee of [the] superannuation fund,” Mr Figot said.
Although the insertion of the bare/holding trust is necessary in order to comply with the LRBA laws, it can cause taxation issues, Mr Figot said.
For example, Mr Figot said it’s sometimes questioned whether the bare/holding trust should lodge a separate income tax return.
The draft legislation, released yesterday, is set to clarify that the SMSF trustee should be treated as the owner of the asset of the bare/holding trust, instead of the trustee of the bare/holding trust.
“This means that the bare/holding trust is ignored and anything that happens to or results from being the owner of the asset, such as receiving dividends and franking credits, affects the SMSF trustee and not the bare/holding trust trustee. In short, the changes will implement a ‘look through’ situation,” Mr Figot said.
The legislature acknowledges that many have been operating as if these changes were already law, stating “the long-standing industry practice for certain types of instalment warrants and receipts has been to ignore the trust and to treat the investor as the owner of the asset.”
These changes, if enacted, will clarify that such treatment was appropriate Mr Figot said.
Mr Figot also noted the draft changes only affect income tax and don’t have any impact upon GST, and don’t change the position in respect of stamp duty.
“The laws and the practices in respect of the stamp duty vary … However, a general rule of thumb in states such as Victoria is that the most critical aspect to ensure stamp duty efficiency – and the aspect most commonly botched – is that the deposit is paid from a bank account in the name of the SMSF,” Mr Figot added.
“Again, the proposed changes have no impact in respect of stamp duty. Accordingly, it is still just as critical as ever that great care be taken in respect of stamp duty issues,” he said.
The changes are set to apply retrospectively from 1 July 2007.
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