27/02/2014

On 11 December 2013 the ATO issued a draft determination titled “Self Managed Superannuation Funds (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 20xx”.  The purpose of releasing the draft was to receive submissions from the public by 31 January 2014.

The determination relates to assets purchased by an SMSF using a limited recourse borrowing arrangement and definitively addresses the issue of what happens with the asset once the loan has been repaid.

The answer has always been that the asset must be transferred from the Holding Trustee back to the Fund Trustee.  Why?  Because under s71(8) of the SIS Act the Fund’s interest in the holding trust is an in-house asset because it is an investment in a related trust and the statutory exclusion in that subsection no longer applies because the loan has been repaid.

With the threshold for allowable in-house assets being 5% of the total value of the fund those SMSFs who are heavily invested in property (particularly a single property) were likely to fall foul of this in-house asset test.

The draft determination proposes that when the loan is repaid the interest in the holding trust will not become an in-house asset merely because the loan has been repaid and legal title remains with the Holding Trustee.  While there are qualifications requiring the arrangement to meet certain requirements outlined in s67A(1), this is the general message of the draft determination.

The draft determination also addresses whether the Fund’s interest in the holding trust in the period between when the purchase contract is exchanged and settled could be an in-house asset.  Simply stated the draft determination says “No”.

The new legislative instrument is proposed under paragraph s71(1)(f) of the SIS Act.  If finalised the operation of this determination will be retrospective to 24 September 2007 and therefore will apply to all LRBA transactions which were established and operate under either s67(4A) or the now current s67A and s67B.

While the determination has not yet been finalised, if implemented as proposed it is likely to mean that the imperative to promptly transfer the title of the acquired asset from the Holding Trustee to the Fund Trustee is removed.  In theory the property could remain in the name of the Holding Trustee until it is ready to be eventually sold to a third party.

This is likely to be music to the ears of Trustees who don’t want to incur the expense of the transfer of the asset to the Fund.

One thing to keep in mind though is the ongoing cost of maintaining the holding trust and the corporate holding trustee.  ASIC’s annual fee will still be payable until the asset is transferred to the Fund and the holding trust is unwound. It may be necessary to prepare financial statements each year for the holding trust and or the holding trustee as well.

Our fee for our unwinding suite of documents is $825 (inc GST) with a further $495 (inc GST) in fees if you would like us to implement the transaction.  Stamp duty and government charges will be another $339 (no GST).  All up the transfer is likely to cost about $1,660, so if you intend to hold the asset for more than say 3 years it could be cheaper to transfer the asset to the Fund than to continue to pay for the upkeep of the holding trustee and trust. However different fees apply from the duties and titles offices depending upon where the property is located.

If you require assistance to transfer property back to the Fund following repayment of a loan or guidance on the current requirements please contact our team of specialist lawyers on (02) 8296 6222,