SMSF members seeking to move a property out of a limited recourse borrowing arrangement (LRBA) and into their hands may trigger capital gains tax and stamp duty if they fail to follow correct procedures, some of which must be set in place years beforehand, a superannuation lawyer has stated.
SuperCentral superannuation special counsel Michael Hallinan said given an LRBA requires the asset to be held in a separate trust structure while it is being paid off, specific strategies must be employed to unwind those arrangements and transfer it to the SMSF members or a third-party buyer.
“You need to exercise care to ensure the exit from a LRBA will be capital gains tax (CGT) and stamp duty neutral even before the fund has purchased the property,” Hallinan said.
“For the transfer to the SMSF by the holding trustee to be exempt from stamp duty, it is necessary for the fund to use the apparent purchaser exemption from duty that most states allow.
“To use the apparent purchaser rules, all the money for the purchase comes from the fund and/or the lender to the fund, and it’s not enough for it to have occurred; to get the duty exemption you need to prove that it occurred.
“Don’t wait for 10 years to put together the necessary bank statements as evidence of the source of the funds – those statements won’t be available then. Do it straight after settlement of the purchase.”
He added once a loan has been repaid, the holding trust will become a related trust and viewed as an in-house asset, and if the SMSF cannot meet the in-house assets test, the property should be transferred to the fund.
There would be no CGT payable on that transfer if the holding trust established for the LRBA met the requirements of section 106.50 of the Income Tax Assessment Act 1997.
“These provisions require the fund be ‘absolutely entitled’ to the property as against the holding trustee,” Hallinan said.
“The ATO says ‘absolute entitlement’ effectively means the ability of a beneficiary who has a vested and indefeasible interest in the trust property to call for the asset to be transferred to them or at their direction.”
He said caution should be applied with banks that request the holding trustee not to transfer the property to the fund until the loan has been repaid or the bank consents as these restrictions could mean the fund is no longer ‘absolutely entitled’ and CGT will be payable on the transfer from holding trustee to SMSF trustee.
“If the holding trustee sells directly to a third-party buyer on market, then provided the SMSF is ‘absolutely entitled’, the CGT will sheet home to the fund. The fund’s CGT rate is lower than the normal rate. Otherwise, the CGT will be payable by the holding trustee, which is a big problem as the holding trustee’s CGT rate is the maximum,” he noted.
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason