SMSF borrowings: in-house asset exemption — ATO draft instrument

To provide certainty to SMSF trustees, the ATO has released for comment Draft Legislative Instrument - Self Managed Superannuation Funds (Limited Recourse Borrowing Arrangements - In-house Asset Exclusion) Determination 20xx . The draft instrument, to be made by the ATO (as SMSF regulator) under section 71(1)(f) of the SIS Act, proposes an in-house asset exemption for an investment in a related trust held by an SMSF as a required part of a limited recourse borrowing arrangement (LRBA) in the periods outlined below (that is, the test time). The ATO is inviting comments on the draft legislative instrument and explanatory statement.

 

On 11 December 2013, the ATO advised that it has become aware of a number of issues regarding the application of the in-house asset exemption provided by section 71(8) of the SIS Act to an investment in a related trust held by a SMSF as part of an LRBA under section 67A. The ATO said that the current exemption does not include an SMSF's investment in a related trust (that is, a holding trust) from being an in-house asset of the SMSF at the following points in time:

  • at the beginning of an LRBA where a borrowing referred to in section 71(8)(b) has not yet begun or the related trust does not yet hold the acquirable asset under section 67A; and
  • where the asset continues to be held in the related trust after the borrowing referred to in section 71(8)(b) of the SIS Act has been repaid.

LRBAs and in-house assets — background

This draft legislative instrument seeks to address some of the practical limitations with the in-house asset exemption for LRBAs under sections 71(8) and (9) of the SIS Act. At the NTLG Superannuation Technical Sub-group meeting on 3 September 2013, practitioners raised concerns about various impediments and difficulties with the operation of the in-house asset exemption for LRBAs.

Broadly, the ATO has previously expressed a view that the in-house asset exemption under sections 71(8) and (9) of the SIS Act no longer apply once a loan under a LRBA is eventually repaid. Accordingly, an acquirable asset must be transferred from the holding trust back to the SMSF once the loan is repaid. In response, the ATO is now proposing to make a legislative instrument under section 71(1)(f) of SIS Act to provide an in-house asset exemption to address this issue.

Note also that the duties legislation in NSW and Qld was specifically amended to provide a duty exemption for transfers of dutiable property involving LRBA custodians of complying superannuation funds. However, practitioners have expressed concern that impediments and difficulties remain in some other jurisdictions in terms of accessing an exemption for transfer duty (and CGT and GST issues) in relation to a transfer of the acquirable asset from the holding trust to the super fund following the repayment of the loan: see minutes of the NTLG Superannuation Technical Sub-group meeting on 3 September 2013 .

SPAA welcomes ATO's draft instrument

The SMSF Professionals' Association of Australia (SPAA) has applauded the ATO's practical approach of using a draft legislative instrument to quickly address an in-house asset problem for limited recourse borrowing arrangements (LRBAs).

SPAA expects that the legislative instrument, which does not require parliamentary approval, will take effect soon after submissions close on 31 January 2014. Head of Technical and Professional Standards at SPAA, Graeme Colley, said it is encouraging for the industry when the ATO as regulator of SMSFs adopts such a practical approach. When finalised, Mr Colley said the legislative instrument will go a long way to resolving some of the technical issues that were impeding the practical implementation of the law around LBRAs.

According to SPAA, the main benefits of the ATO's practical approach is that problems that arose with the payment of double stamp duty in some States, and the need for the paperwork associated with the transfer of the property once the loan had been paid out, are eliminated. Mr Colley said the instrument should also enable a property to be sold to the market from the holding trust when the trustees decide, removing the need for a number of intervening transactions.

Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:

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