Critical steps outlined with property transfers and trust cloning
While trust cloning can be an effective strategy for transferring an asset from a related trust to an SMSF without paying duty, it is vital the right steps are followed to avoid issues with the anti-avoidance provisions, cautions a law firm.
Speaking at the CGW Virtual SMSF Intensive Day, Cooper Grace Ward Lawyers associate Keeghan Silcock explained that in Queensland, there is no specific duty concession available where a client is looking to transfer an asset from a member into an SMSF.
However, it may be possible in certain circumstances to have a transfer from a related trust into an SMSF with no duty payable, Ms Silcock said.
She gave an example of a property owned in Queensland by a family trust that the client wants to transfer into super.
“We have a property which is owned in Queensland by the Trump Family Trust and we’re wanting to get that into super, so we set up a new SMSF, the Top Trumps SMSF, and we have Donald and Melania as the sole two members with equal member balances and that’s really important because Donald and Melania are also the sole income and capital default beneficiaries of the family trust,” she explained.
“What that means is that they are the only two people holding trust interests in both of these two trusts, the family trust and the family SMSF.”
Ms Silcock explained that a strategy can be used where Trump Pty Ltd declares that it ceases holding the property in Queensland as trustee for the family trust, and then commences holding that as trustee for the Top Trumps SMSF.
“In this example, we do that by having Trump Proprietary Limited acting as trustee of both of these trusts, but it is possible to do this where there are different trustees — you just need to include an additional step of having the SMSF appoint the other trustee as its custodian for the purposes of holding that property,” she stated.
“Due to the way the duty legislation in Queensland operates, this is not a dutiable transaction and so if it’s done properly, there is no duty payable in Queensland on this change.
“If we do this with Trump Proprietary Limited acting as trustee of both the trusts, it is possible to change the trustee for one of those entities at a later date, but we don’t suggest doing that in the short term because it can trigger anti-avoidance issues.”
Speaking in the same session, Cooper Grace Ward Lawyers partner Clinton Jackson said if the right steps are taken and everything is dealt with appropriately, there won’t be compliance issues with this strategy.
“With the trust cloning, if you were to immediately take steps that would defeat the trust cloning, there is a risk that the anti-avoidance provisions would apply,” he warned.
“In our experience though, most of our clients deal with this in a more sensible way and they’re not looking to change trustees or go too close to the line, and we’ve never had anyone have any issues with the anti-avoidance provisions with these types of transactions.”
Mr Clinton also pointed out that where SMSF professionals are looking to use exemptions to move property into super in NSW and Victoria, they still need to be conscious of section 66 of the SIS Act.
“[This] means that if we’re acquiring something from a related party, it needs to be business real property, so we can’t do residential, and it also needs [to be] at market value,” he said.
“Now market value could be one of two things; it could be a payment from the fund to that person, and in NSW, that would be OK, but in Victoria, it’s not.”
The other way to sort out a market value payment, he said, is for the fund to accept an in-specie contribution and therefore increase the value of the fund.
“That would effectively satisfy the market value requirements of section 66 because the fund has taken an increase and the member has made that as a contribution,” he said.
“So, there are definitely ways to deal with it. It’s just a matter of making sure we structure those transactions properly, and our documentation is really key.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.