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Lawyer flags additional risks with gift and loan back arrangements

By miranda-brownlee-momentummedia-com-au
January 16 2023
2 minute read
matthew burgess smsf
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Following the ATO’s recent warning concerning gift and loan back arrangements involving SMSFs, a specialist lawyer has highlighted some other risks with these arrangements.

Last month, the ATO issued a warning to SMSFs flagging their concerns about a particular asset protection arrangement, marketed as the Vestey Trust.

In a recent article, View Legal director Matthew Burgess said that this particular scheme is a type of gift and loan back arrangement, aimed at providing asset protection that would be otherwise problematic due to related tax and stamp duty asset transfer costs.


Mr Burgess explained that with a gift and loan back arrangement, the owner of an asset gifts an amount equal to their equity in the asset to a family trust or low risk spouse. 

“The family trust then lends an amount of money to the owner and takes a secured mortgage over the property or registers a security interest on the Personal Property Securities Register over the personal assets of the individual the protection is intended for,” he stated.

“Implemented correctly, the gift and loan back approach ensures there are no CGT or stamp duty consequences to achieving asset protection, subject to the claw back rules under the bankruptcy regime and various state based property or conveyancing acts.”

The ATO in its update warned that the arrangement was a compliance risk for SMSFs as it may contravene one or more super laws.

The Tax Office cautioned that this kind of arrangement may:

  • Result in the giving of a ‘charge’ over, or in relation to, a fund asset by the SMSF trustee
  • Involve the ‘borrowing’ of money by the SMSF trustee
  • Expose fund assets to unnecessary risk if it’s not clear who owns them
  • Cause the fund to be maintained in a way that doesn’t comply with the sole purpose test.

For arrangements that don’t involve SMSFs, Mr Burgess explained that where implemented appropriately, gift and loan back arrangements can potentially be a valid and effective asset protection strategy despite the high profile case of Re Permewan No 2 [2022] QSC 114.

However, he warned that there are a myriad of potential issues that still need to be considered.

“For example, care should always be taken to ensure that the trust which will make the secured loan does not itself conduct risky activities such as running a business,” said Mr Burgess.

While the arrangements can be entered into without registering a mortgage, if this step is not taken, the trust that has made the loan will simply be an unsecured creditor, he explained.

The impact of the arrangement in relation to potentially accessing the small business tax concessions should also be carefully considered, he cautioned.

“While a family home should be excluded from the $6 million test, a secured loan will generally be included if the trust is an affiliate or ‘connected entity’ under the Tax Act [Income Tax Assessment Act 1936],” he stated.

Mr Burgess also explained that where a third party financier already has a mortgage over the property, they will generally require a deed of priority securing that lending (to whatever level it may be from time to time) as a first priority before the trust’s second mortgage. 

The provisions of the Tax Act under subdivision EA also need to be considered, he said.

“While there has been some significant dilution of the circumstances where subdivision EA will apply given the Tax Office’s approach to UPEs, in some situations it remains potentially relevant,” he stated.

“In particular, the second ‘tranche’ of the gift and loan back arrangement involving a loan out of a trust can be problematic if at the time the loan is made, there was an unpaid distribution to a corporate beneficiary.”

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Miranda Brownlee

Miranda Brownlee

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 also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: miranda.brownlee@momentummedia.com.au