Limited recourse borrowing arrangements and a 'two step' transfer process
Issue raised
Does the indirect transfer of real estate from an SMSF member to a custodian under a limited recourse borrowing arrangement whereby title is first transferred to the SMSF trustee for a mere instant in time before transfer to a custodian (at which point the borrowing occurs), fall foul of s67A of the Superannuation Industry (Supervision) Act 1993 (SISA)?
Background information provided by member
This submission is concerned with real estate located in Western Australia which constitutes business real property and the practices of the Western Australian Office of State Revenue ('OSR').
Broadly, under s 122(1) of the Duties Act 2008 (WA) ('WA Duties Act') nominal duty is chargeable on a transfer of dutiable property from an SMSF member to the trustee of an SMSF, where certain conditions are met.
Naturally, where the trustee of an SMSF enters into a limited recourse borrowing arrangement, the asset being acquired (in this case, real estate) must settle in the name of the custodian and not the SMSF trustee.
It has recently been the policy of the OSR to charge ad valorem duty on a transfer of real estate from an SMSF member to a custodian where that member would have otherwise been eligible for the concessions contained in s122(1) of the WA Duties Act had the real estate settled in the name of the SMSF trustee and not the custodian.
Therefore, SMSF members are unable to take advantage of the s122(1) concession where the trustee of the SMSF acquires real estate under a limited recourse borrowing arrangement. There is no provision in the WA Duties Act that rectifies this anomaly.
This is contrary to a similar New South Wales duty concession. Broadly, under s 62A of the Duties Act 1997 (NSW) ('NSW Duties Act') concessional duty is chargeable on a transfer of dutiable property from an SMSF member to the custodian of a trustee of an SMSF, where certain conditions are met.
One suggested process to enable SMSF members to take advantage of s 122(1) of the WA Duties Act where a limited recourse borrowing arrangement is involved is a 'two step' transfer process. Broadly, this process involves a member transfer to the SMSF trustee under s122(1) followed by a transfer from the SMSF trustee to the custodian. Nominal duty is chargeable on this second transfer under s 126 of the WA Duties Act.
The documentation evidencing the above two step process is to be carefully drafted to ensure that legal title to the real estate rests with the SMSF trustee for a mere instant in time - the subsequent transfer of the legal title to the custodian is designed to be instantaneous. At the moment of transfer to the custodian, the borrowing occurs. Further, merely the legal title is transferred to the custodian, with the reservation of the beneficial interest remaining on trust for the SMSF member.
It is understood that the policy of the OSR is to charge nominal duty on the above two step process in accordance with ss 122(1) and 126 of the WA Duties Act.
Industry view / suggested treatment provided by member
Subject to the careful drafting of the specific documents, the two step process is consistent with s67A of the SISA. Section67A of the SISA does not expressly prohibit legal title to the single acquirable asset being transferred to the SMSF trustee. This coupled with the fact that, under the two step process, title remains with the SMSF trustee for a mere instant and is immediately transferred to the custodian and that the borrowing occurs after transfer to the custodian further supports this conclusion. (The documents confirm that the beneficial ownership is held on trust for the member from the time the sale contract is executed.
No mischief is caused under the two step process and the requirements that the 'single acquirable asset' is held on trust and that no borrowing occurs before legal title is held by the custodian are still being met. Rather, the two step process provides a practical solution to enable SMSF members to take advantage of concessions that would otherwise be available to them had there not been an anomaly between the relevant provisions of the WA Duties Act and the borrowing provisions of the SISA.
The existence of s122(1) implies the State Parliament intended that an SMSF member who satisfies certain conditions could transfer real estate to their SMSF with nominal duty. A two step process is consistent with this intention.
Such a two step process would only be used until an express legislative carve out is achieved, similar to that contained in the NSW Duties Act.
Technical Reference
As set out above
Impact on clients suggested by member
If the answer is in the negative, SMSF members may be unable to take advantage of the stamp duty concessions that they are otherwise entitled to.
Priority of issue where ATO view is required suggested by member
Medium
ATO Initial Response
As stated at the December 2012 NTLG Superannuation Technical Sub-group meeting in relation to Taxpayer Alert TA 2012/7 (see agenda item 8), a superannuation fund trustee must not at any stage hold the single acquirable asset prior to it being acquired by the trustee of the holding trust under a limited recourse borrowing arrangement. We are still of this view and consider that an SMSF trustee obtaining legal title to the asset, even for a short period of time, prior to it being acquired by the holding trust trustee is not consistent with section 67A.
Meeting Discussion
No substantive comments were received from members.
It was noted that the facts provided and question posed is highly specific to the relevant provisions of the WA Duties Act (Duties Act 2008 (WA)).
- Last modified: 17 Apr 2013QC 32720