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  • 1. SMSFs Borrowing to buy Property Peter Johnson CST Corporate Solutions Pty Ltd

2. Changes to SIS

  • Tax Law amendment Bill No.5, 24 September 2007 two amendments to SIS Act section 67 &71
    • Sec 67borrowing prohibition clause..has new clause 67(4A)
    • Sec 71(8)..definition of in-house assets.. specifically excludes warrant trust as in-house asset

SMSFs Borrowing to buy Property Peter Johnson 3. New Section 67(4A)

  • Exception--installment warrants (4A) Subsection(1) does not prohibit atrustee(theRSFtrustee ) of aregulated superannuation fundfrom borrowing money, or maintaining a borrowing of money, under an arrangement under which:
  • (a) the money is or has been applied for the acquisition of anasset(theoriginalasset ) other than one the RSFtrusteeis prohibited by this Act or any other law from acquiring; and
  • (b) the originalasset , or anotherasset(thereplacement) that:
    • (i) is anassetreplacing the originalassetor any otherassetthat met the conditions in this subparagraph and subparagraph(ii); and
    • (ii) is not anassetthe RSFtrusteeis prohibited by this Act or any other law from acquiring;
  • is held on trust so that the RSFtrusteeacquires a beneficial interest in the originalassetor the replacement; and
  • (c) the RSFtrusteehas a right to acquire legal ownership of the originalassetor the replacement by making one or more payments after acquiring the beneficial interest; and
  • (d) the rights of the lender against the RSFtrusteefor default on the borrowing, or on the sum of the borrowing and chargesrelatedto the borrowing, are limited to rights relating to the originalassetor the replacement; and
  • (e) if, under the arrangement, the RSFtrusteehas a right relating to the originalassetor the replacement (other than a right described in paragraph(c))--the rights of the lender against the RSFtrusteefor the RSFtrustee 's exercise of the RSFtrustee 's right are limited to rights relating to the original assetor replacement.

SMSFs Borrowing to buy Property Peter Johnson 4. New Section 67(4A)

  • So what does it mean?
    • Trustee must borrow for purpose of acquiring an asset, not against an existing asset
    • Asset must not be prohibited (ie.. Acquiring an asset from a member)
    • Asset must be held on trust
    • SMSF Trustee can acquire the asset after it has paid for it
    • Lenders rights against the trustee are only agains the asset purchased

SMSFs Borrowing to buy Property Peter Johnson 5. New Section 71(8)

  • If, at a time:
    • (a) anasset(theinvestment asset ) of asuperannuation fundis
    • aninvestmentin arelated trustof thefund ; and
    • (b) therelated trustis one described in paragraph 67(4A)(b) in connection with a borrowing, by thetrusteeof thefund , that is covered by subsection 67(4A); and
    • (c) the only property of therelated trustis the originalassetor replacement described in that subsection;
  • theinvestment assetis an inhouseassetof thefundat the time only if the originalassetor replacement described in subsection 67(4A) would be an inhouseassetof thefundif it were anassetof thefundat the time.

SMSFs Borrowing to buy Property Peter Johnson 6. New Section 71(8)

  • So what does it mean?
    • Without this section an investment in the warrant trust would be an in house asset and therefore not allowed
    • This section does not allow the SMSF Trustee to take up units in a Unit Trust (ATO Instalment Warrants and super funds questions and answers)
    • Other problems is unwinding a unit trust as this could trigger
      • Capital Gains Tax
      • Stamp Duty
      • GST
    • May not be able to unwind if a related trust (can acquire residential real estate from a related party)
    • Because of these issues a unit trust is not recommended

SMSFs Borrowing to buy Property Peter Johnson 7. Bare Trust Structure

  • The recommended structure is a bare trust
    • This effectively makes the original asset an asset owned directly by the SMSF
    • Only used to satisfy s67(4A) requirement that the asset be held in trust
    • If structured correctly will mean no CGT, Stamp Duty or GST upon unwinding the arrangement

SMSFs Borrowing to buy Property Peter Johnson 8. What is a Bare Trust?

  • What is a bare trust?
    • An asset is held by the trustee for the absolute benefit of a beneficiary.
  • Who can be the trustee?
    • Anyone except the trustee of the SMSF (you cant hold an asset in trust for yourself).

SMSFs Borrowing to buy Property Peter Johnson 9. ATO Concerns TA 2008/5

    • monies advanced by a member or related party at zero or less than a commercial rate of interest could be characterised as a contribution to the SMSF. This may result in the trustee/member having to pay excess non-concessional contributions tax under Division 292 of the Income Tax Assessment Act 1997
    • So you can lend to the fund yourself but it must not be at a discounted interest rate

SMSFs Borrowing to buy Property Peter Johnson 10. ATO Concerns TA 2008/5

    • monies advanced by a member or related party at greater than a commercial interest rate of interest may result in:
      • a breach of the sole purpose test outlined in section 62 of the SIS Act, on the basis that the excessive interest rate may mean that the SMSF is not being maintained solely for the purpose of providing superannuation benefits, and/or
      • the trustee breaching paragraph 65(1)(b) of the SIS Act, which prohibits the trustee from giving financial assistance to a member of the SMSF or to a relative of such a member using the resources of the SMSF;
    • So you can lend to the fund yourself but you must not profit from the fund by charging excess interest

SMSFs Borrowing to buy Property Peter Johnson 11. ATO Concerns TA 2008/5

    • interest capitalised may result in the arrangement failing to meet the requirement that the money borrowed is or has been applied for the acquisition of an asset under paragraph 67(4A)(a) of the SIS Act;
    • a personal guarantee of the type outlined in paragraph 6 (d) above may result in recourse being made to the assets of the SMSF other than the asset acquired (or any replacement) in the event that the guarantee is enforced against the trustee as the principal debtor, contrary to the intent that the exception in subsection 67(4A) of the SIS Act only applies to limited recourse borrowings; and
    • an asset of the type outlined in paragraph 6 (e) may result in breaches of the SIS Act or SIS Regulations (for example, intentionally acquiring an asset from a related party, which breaches subsection 66(1) of the SIS Act).
    • Trustees are also reminded that existing fund assets cannot be placed into a limited recourse borrowing without breaching the SIS regulatory requirements.

SMSFs Borrowing to buy Property Peter Johnson 12. Other ATO Issues

  • There are issues, listed below, in respect of which the Tax Office does not yet have a formal view. To the extent that these issues arise under a given arrangement, there may be concerns whether the arrangement complies with the law. These issues are:
    • Does an arrangement where a borrowing is guaranteed by a third party satisfy the new laws, particularly where the personal guarantee is provided by a member or a related party?
    • Does an arrangement that permits re-financing satisfy the new laws?
    • Does an arrangement that permits capitalisation of interest satisfy the new laws?
    • Can multiple drawdowns from a single loan facility satisfy the new laws?

SMSFs Borrowing to buy Property Peter Johnson 13. Other ATO Issues

  • Other issues that are still being considered include:
    • What constitutes an original asset and a replacement asset for the purposes of the new law?
    • What constitutes maintaining a borrowing of money?
  • This publication will be updated when the Tax Offices view is settled.

SMSFs Borrowing to buy Property Peter Johnson 14. Personal Guarantees

    • a personal guarantee of the type outlined in paragraph 6 (d) above may result in recourse being made to the assets of the SMSF other than the asset acquired (or any replacement) in