The Legislative Instrument SMSF (limited recourse borrowing arrangements – in-house asset exclusion) determination 2014 released by the ATO last year means that the fund’s interest in the bare (holding) trust will not become an in-house asset merely because the loan has been repaid. Accordingly, it is no longer critical to transfer the property to the fund in order to comply with the in-house asset rules.
In light of this, many trustees decide to do nothing and leave the property in the name of the holding trustee until it is sold to a third party. However we recommend that the trust be unwound and title to the property be transferred to the fund sooner rather than later.
And this is why:
While keeping the property in the holding trust may seem to be the cheapest option, this may not remain true in the long run.
Let’s not forget that there are ongoing costs of maintaining the holding trust and the corporate holding trustee. For example, ASIC’s annual fee for the corporate holding trustee remains payable until the company is de-registered (and it is critical that this does not happen until after the transfer to the fund is registered). The current ASIC annual fee is $246 for a proprietary company.
On the other hand, unwinding the holding trust may reduce the costs incurred by the fund for the preparation of financial statements and audits.
There is no need to worry about stamp duty: provided the transaction was properly set up from the outset (i.e. the fund paid for all of the purchase money, including the deposit) only nominal stamp duty is payable on the transfer from the holding trustee to the fund trustee. For example, in New South Wales, stamp duty on the transfer is $50 and in Victoria it is exempt from duty.
While there are other associated costs for the preparation of the necessary documentation to record the termination of the trust and implement the transaction, the long-term savings are likely to outweigh these costs.
If trustees intend to hold the asset for more than, say, four or five years it could be cheaper to transfer it to the fund than to continue to pay for the upkeep of the holding trustee and trust. Different fees apply from the duties and titles offices depending upon where the property is located.
Less hassle if you do it now
If the fund is going to transfer the property into the name of the fund trustee anyway, why wait? Postponing the transfer only increases the risk of losing or forgetting evidence which is crucial to the application for concessional stamp duty, thereby jeopardising its assessment by the local duties office. Instead, the trustee should start the process while everything is easily available or accessible.
Easier to deal with the property
Transferring the property to the fund means the trustee can change or improve the property or do an in-specie transfer to members more readily.
Selling the property
If the holding trustee is to sell the property directly to a third party, compliance documents should be prepared to show the holding trustee is acting at the direction of the fund trustee. Alternatively, if the property has already been sold, it may be wise to have documents prepared confirming the winding up of the trust for audit purposes.
Julie Hartley, solicitor, Townsends Business and Corporate Lawyers