New Taxpayer Alert | SUPERCentral

We’ve had a number of calls regarding new Taxpayer Alert TA 2012/7 which outlines the ATO’s concern with a number of scenarios relating to limited recourse borrowing arrangements (LRBA) by SMSFs.
Under the heading “Arrangement 1” the ATO lists six scenarios that cause them difficulty. We have consistently advised that these scenarios are non-compliant with the law and we have never allowed a client of ours to enter an LRBA using any of the six scenarios.
Some confusion in the market surrounds scenario 2(c). This scenario is where 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. Note that this scenario has two limbs, namely that the holding trustee is not in existence AND that the holding trust is not established at the date of the contract.
We agree totally with the ATO that the holding trustee must be in existence when the contract to acquire the asset is signed because it is the holding trustee who is acquiring the property.
However it is not possible in some States (NSW, ACT and TAS) to execute the holding trust deed before the contract to acquire the asset as this could lead to full ad valorem duty being levied twice – once on the declaration of trust and once on the contract (see for example Platinum Investment Management Ltd v Chief Commissioner of State Revenue (No.2)[2010] NSWSC 1.
The ATO appears to be concerned, and rightly so, that if the contract were signed before the holding trustee was even in existence (and therefore before the holding trust could exist) the deposit paid by the SMSF and or the loan repayments by the SMSF may be considered as a payment of superannuation benefits given the requirement that the title of the property be held by the trustee of the holding trust.
However, provided the holding trustee is in existence and enters the contract, the mere fact that the holding trust deed is entered thereafter does not invalidate the LRBA. Provided all the deposit is paid by the SMSF, the holding trustee holds the property in a resulting or implied trust until the deed is actually executed thereby formalising the trust. All of this occurs before completion of the purchase thereby making the situation clearly compliant when the purchase takes place. The minutes of both the holding trustee and the SMSF trustee, which we provide with our document pack and which are signed before the contract, make the situation quite clear.
We take this opportunity to re-assure our clients and loyal supporters that we believe the process of executing the holding trust deed after the contract will safeguard against double stamp duty in NSW, ACT and TAS and will not of itself breach the requirements of the SIS Act in respect of LRBAs. Don’t hesitate to contact us with any queries.”