ATO to provide an administrative solution to the redundant holding trust

One critical element of a limited recourse borrowing arrangement is that the asset which has been acquired by means of a limited recourse borrowing arrangement must be held in trust for the SMSF.  This trust is commonly called a holding trust.

While the debt under the limited recourse borrowing arrangement remains on foot, the SMSF’s interest in the holding trust is expressly excluded from counting as an in-house asset.  However, once the debt is repaid, the express exclusion ceases to apply and the SMSF’s interest in the holding trust is now counted as an in-house asset.  This means that at the next balance date the SMSF will usually have an excessive level of in-house assets – as the maximum permitted level is 5% of the market value of the SMSF.  

If the SMSF does have an excessive level of in-house assets at balance, the SMSF Trustee must then prepare a plan to divest in-house assets to achieve the 5% maximum level of in-house assets by next balance date.  This will usually mean that the acquired asset will have to be sold.  On a strict reading of the relevant provisions a transfer of the asset from the holding trust to the SMSF is not a divestment – so such a transfer after balance date will not solve the problem.

Currently, this problem is managed by transferring title to the acquired asset from the holding trust to the SMSF (this is unwinding the holding trust) before balance date (thereby avoiding breaching the 5% in-house asset limit).  Alternatively, a small portion of the original debt is retained (refinanced by a small related party loan) so that the in-house assets exception continues to apply to the holding trustee.

The ATO has now suggested that it will solve the redundant holding trust by making a determination for the purposes of the in-house asset definition, that the interest of an SMSF in the holding trust after the debt has been repaid is to be excluded from being counted as an in-house asset.  This determination, when made, will be retrospective to 24 September 2007 (being the date the SIS Act was amended to permit limited recourse borrowing).

If and when this determination is made, there will be no regulatory need to wind up the holding trust when the debt has been repaid: the asset can remain in the holding trust until the asset is sold to a third party or title transferred to the SMSF.