February 2013 Newsletter

In this edition:

Welcome

How to access the Schoolkids Bonus

What happens to my super when I die?

The new Director Penalty Regime - important dates

SMSF investment in property takes care

Warnings about arrangements that do not comply with superannuation law
The ATO has issued Taxpayer Alert TA 2012/7 warning taxpayers of certain arrangements entered into by self managed superannuation funds (SMSFs) to acquire property that do not comply with superannuation law, particularly those involving limited recourse borrowing arrangements (LRBAs) or the use of a related trust.

The ATO says it is concerned that some of these arrangements, if structured incorrectly, cannot be restructured or rectified simply. Further, unwinding the arrangement may involve a forced sale of the asset, which could cause a substantial loss to the fund. 

Borrowings (LRBAs)
Broadly, the ATO says the Alert applies to LRBAs that SMSFs enter into post-7 July 2010 to acquire an asset and that have at least one of the following features:

•     the borrowing and title of the property is held in an individual's name and not in the name of the trustee of the holding trust. The SMSF funds a part of the initial deposit and the ongoing loan repayments;
•     the title of the property is held by the SMSF trustee and not the trustee of the holding trust;
•     the trustee of the holding trust is not in existence, and the holding trust is not established, at the time the contract to acquire the asset is signed;
•     the SMSF trustee acquires a residential property from an SMSF member;
•     the acquisition comprises two or more separate titles and there is no physical or legal impediment to the two titles being dealt with, assigned or transferred separately; or
•     the asset is a vacant block of land and the SMSF intends to use the same borrowing to construct a house on the land. The land is transferred to the holding trust prior to the house being built.

According to the ATO, the arrangements described above may be in breach of the sole purpose test in s 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). In addition, it says s 67 of the SIS Act, which prohibits SMSF trustees from borrowing money or maintaining an existing borrowing, may be breached. The ATO also says s 67A(2) of the SIS Act may be breached if the asset acquired is not a single asset.

Further to any consequences under the SIS Act, the ATO says that under Div 304 of the Income Tax Assessment Act 1997 (ITAA 1997), fund members may also be required to include a SMSF loan repayment in their assessable income.

TIP: Although not mentioned in the Taxpayer Alert, trustees should also consider whether there are any adverse stamp duty issues in relation to a holding trust for the purposes of a LRBA. For example, the apparent purchaser concession (ie $50 nominal duty) is available under s 55 of Duties Act 1997 (NSW) but only if certain requirements for the concession are satisfied. It is important to note that each state and territory has its own stamp duty rules. 

Using a related unit trust

The ATO says the Alert also applies to arrangements that have the following (or substantially similar) features:

•     individuals are either members of an existing SMSF or establish a new SMSF and rollover their existing super benefits into the SMSF;
•     an existing related unit trust is used to acquire property, or a new related unit trust is established for the purpose of acquiring property;
•     SMSF fund members subscribe for units in the unit trust and may borrow money from a commercial lender to fund the subscription;
•     the SMSF also subscribes to units in the unit trust; and
•     the trustee of the unit trust purchases an asset such as a property that is rented out, and the arrangement has one or more of the following characteristics: (1) the asset acquired by the unit trust is used as security for the money borrowed by the members to subscribe for units in the unit trust; (2) the assets of the unit trust include an asset that was acquired from a related party of the super fund that is not business real property; and/or (3) the assets of the unit trust include real property that is leased to a related party of the super fund, and the real property subject to the lease is not business real property. 

According to the ATO, the investment arrangement may be in breach of the sole purpose test in s 62. In addition, it says the SMSF's investment in the unit trust may fail to meet the requirements of reg 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations), and would be an in-house asset under s 71 of the SIS Act (counting towards the 5% limit under s 83).

The ATO says that in addition to the issues arising under the SIS Act and SIS Regulations, the arrangement may also cause the SMSF to become a non-complying super fund for tax purposes. This means that the super fund would have to include amounts of income from previous years in its assessable income under s 295-352 of the ITAA 1997. Further, the ATO notes the unit trust may also incur a CGT liability in relation to the disposal of the property, which the members of the SMSF may be required to include in their assessable income on redemption of their units in the unit trust.

Sources: ATO Taxpayer Alert TA 2012/7; ATO media release No 2012/51, 20 November 2012.

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