We have a client who has a property in their super fund via a bare trust with a limited recourse loan arrangement. As the limited recourse loans have now been paid off, what are the necessary steps that need to be taken to transfer the property from the bare trust to the super fund? Can an asset be left in an LRBA bare/holding trust once the loan is paid off? If yes, can the property be developed?
There is a view that the bare trustee structure causes an in-house asset issue. The asset that the SMSF trustee has is an interest in the bare trust. Therefore, this bare trust can be seen as a related trust, and an investment in a related trust is seen as an in-house asset. SMSFs typically are not allowed to have more than 5 per cent of their assets in in-house assets.
To counteract this in-house asset concern, the legislature added an exception to the in-house rules. See s71(8) of the Superannuation Industry (Supervision) Act 1993 (Cth). It broadly provides that an investment in a related trust that was made in order to meet the LRBA requirement is excepted from constituting an in-house asset.
When the loan is paid off, s71(8) becomes ineffective and the value of the interest in the bare trust then becomes an in-house asset. This once again creates an in-house asset issue within the bare/holding trustee structure.
Prior to April 2014, the SIS legislation suggested that if the asset was to remain in the holding trust after the borrowings had been extinguished, the arrangement would breach the in-house asset rules.
However, as per SMSF (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014, the asset can remain in the trust after the debt has been extinguished and the in-house asset exemption granted under SIS s71(8) can continue.
The instrument is taken to have commenced on 24 September 2007. This aligns with the date of effect of the introduction of provisions in the SISA that allow trustees of regulated super funds to enter into LRBAs. This ensures SMSFs that entered into LRBAs prior to the making of this instrument are not disadvantaged as compared with SMSFs that enter into LRBAs after the making of this instrument.
Some wish to leave the asset in the bare/holding trustee’s name, even after the loan is repaid. This legislative fix would mean that doing so would not cause in-house asset issues from a superannuation law point of view.
One of the requirements of LRBAs is that the asset being acquired cannot be replaced during the life of the loan.
If the asset is subdivided, the ATO considers this to be a replacement. See ATO SMSF ruling SMSFR 2012/1. Accordingly, SMSF trustees who want to significantly improve/alter assets they acquired with LRBAs must first discharge the borrowing.
If the asset is left in the bare trust, the asset cannot be ‘replaced’ even after the loan is paid off. In order for s71(8) to apply, the asset acquired must not have been replaced.
SMSF trustees that wish to ‘replace’ (e.g. by way of improvement) the asset may still need to transfer the asset from the bare trustee to the SMSF trustee.
When the bank’s loan is repaid, there is no further need for the bare trustee, so the super fund calls for transfer of title from the bare trustee to the super fund. To avoid full stamp duty on that transfer, we have to rely on the ‘apparent purchaser’ exemption.
You have to be able to show the commissioner of stamp duty that the bare trustee was the apparent purchaser and that the super fund was the real purchaser. This is done with a statutory declaration which attaches a trail of documents that shows how the money was supplied to the bare trustee. You would need bank statements showing money coming from the super fund’s bank account, copies of cheques to be linked to bank statements and loan documentation.
According to the State Revenue Office (Victoria), the ‘apparent purchaser’ exemption in section 34 of the Duties Act 2000 (Vic) (the Act) and the evidentiary requirements for that section has to be followed.
They also said the following on their website:
The initial purchase of the property by the custodian on behalf of the regulated superannuation fund (RSF) is a dutiable transaction pursuant to s7(1)(a) of the act. Accordingly, it will attract duty at ad valorem rates at the time the property is transferred to the custodian,
Subsequently, the custodian will declare that it is holding the property on trust for the RSF trustee. In this instance, s7(1)(b)(i) of the act charges duty on a declaration of trust relating to the dutiable property, the specification of which forms part of the declaration of trust or part of the transaction constituted by the declaration of trust. Accordingly, in the absence of an exemption, s7(1)(b)(i) of the act would apply separately to charge duty on the declaration of trust made by the custodian.
However, s7(1)(b)(i) will not apply if it can be shown that the custodian is merely holding the property for the RSF under a fixed or bare trust. In that case, s34(1)(a)(i) of the act will apply to exempt the declaration of trust from duty.
In order for s34(1)(a)(i) of the act to apply, it must be shown that all monies for the purchase of a particular property have been provided by the ‘real purchaser’, as this provides confirmation of the resulting trust relationship between the parties. Here, the specific wording of the trust deed may be relevant in making a final determination.
Alternatively, if the transfer of the property to the custodian and the declaration of trust occurred contemporaneously, s17 of the act may apply to exempt the declaration of trust from duty.
The final step of the arrangement is the ultimate transfer of the property from the custodian to the RSF, which is likely to occur upon discharge of the borrowings. Depending on the particular facts of the arrangement, there are two possible exemptions which may apply.
If the commissioner of State Revenue has applied s34(1)(a)(i) of the act to exempt the declaration of trust from duty, then s34(1)(b) of the act would apply to the subsequent transfer of the property to the RSF.
- Alternatively, s36 of the act may apply to exempt a subsequent transfer of the property from the custodian to the trustee of the RSF if evidence is produced which establishes that:
1. Duty was paid when the property was acquired by the custodian;
2. For the whole period from the time the trust was declared by the custodian to the time when the property was transferred to the trustee of the RSF –
- The trustee of the RSF was always the only beneficiary;
- The beneficiaries (who are natural persons) of the RSF were always the only beneficiaries of the RSF; or
- The evidentiary requirements manual sets out the supporting evidentiary requirements for the assessment of duty.
Kenneth Ang, lawyer and chartered tax adviser, K.ANG & Co