Stamp duty and SMSF Limited recourse borrowing arrangements (formerly instalment warrants): is there a double duty jeopardy?

A common concern about limited recourse borrowing arrangements under section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) is whether double stamp duty will apply. In some states, the law eliminates that risk.

This ClearLaw article looks at the double duty risk in Queensland and suggests 2 possible ways (and the related issues) to make sure double duty is not levied.

Limited recourse borrowing: 2 transactions

An SMSF trustee can borrow money in only limited circumstances — including to invest in an asset provided that the borrowing meets the various requirements of section 67A of the SIS Act. These requirements — as explained below — can give rise to a risk that stamp duty on property purchased with borrowed funds may be payable twice, known as "double duty".

The 2 requirements in section 67A that give rise to double duty risk are summarised here (and available in full here {Link to SMSF borrowing product page}):

• The acquirable asset must be held on trust for the SMSF trustee(s) until the loan is repaid. To enable this, the asset is purchased by a 3^rd party (often an SMSF member or a related company) and held on trust for the SMSF trustee. Duty is payable on that transaction. The law is in section 67A(1)(b) which provides that the acquirable asset purchased with the borrowed funds must be held on trust so that the SMSF trustee acquires a beneficial interest in the acquirable asset; and
• The SMSF trustee must have a right to acquire legal title of the asset once the loan is repaid. That transfer to the SMSF trustee can also be dutiable. The law is in section 67A(1)(c) which provides that the SMSF trustee must have a right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest.

Generally, in a limited recourse borrowing arrangement an SMSF trustee will execute a trust deed appointing another person (we call this person a Custodian to avoid confusion with the SMSF trustee) to hold the property on trust until the SMSF trustee has paid one or more repayments of the loan.

The stamp duty liability on an SMSF's limited recourse borrowing

As a result of these requirements, when a superfund trustee purchases an acquirable asset using borrowed funds there will likely be 2 transfers that could attract stamp duty:

• Firstly, a transfer of the acquirable property from its original owner to the Custodian (Primary Transfer); and
• Secondly, a transfer from the Custodian to the superfund trustee after the trustee has made one or more repayments of the loan taken out to purchase the asset (Ultimate Transfer).

State stamp duty will always be payable in respect of a Primary Transfer. Stamp duty may also be payable as a result of the Ultimate Transfer.

In some jurisdictions (for example in Victoria), stamp duty will not apply to the Ultimate Transfer because of a exemption in the State's duty laws (SMSF trustees will need to obtain their own stamp duty advice to confirm if an exemption applies in their jurisdictions). Typically, the exemption provides that a transfer of dutiable property by a trustee to a beneficiary will be exempt from stamp duty provided that there is no change in beneficial ownership.

The law in Queensland

The Duties Act 2001 (Qld) (Duties Act) does not contain an exemption from stamp duty in respect of a transfer of dutiable property by a trustee to a beneficiary.

There are 2 possible approaches to overcoming the double duty risk.

Approach one: principal and agent

Some lawyers have suggested that by adding a clause to the trust deed that appoints the Custodian (Custody Deed), an exemption in the Duties Act could apply to the Ultimate Transfer. We have concerns about this approach.

The approach

The relevant exemption is set out in section 22(3) and reads as follows:

(3) If the commissioner is satisfied —

1. a person (the agent) is appointed in writing as agent for another person (the principal); and
2. under the appointment, the agent enters into a dutiable transaction that is an agreement for the transfer of dutiable property from a person (the original transferor) to the agent on behalf of the principal (the agreement); and
3. the principal provided all the consideration, including the deposit paid; and
4. transfer duty imposed on the agreement is paid; and
5. the dutiable property is later transferred to the principal by the original transferor or the agent (the agency transfer);
6. no transfer duty is imposed on the agency transfer or the agency transfer or the trust acquisition or trust surrender by the principal because of the agency transfer.

(4) For subsection (3)(a), the commissioner must not be satisfied the person was properly appointed as an agent unless the original instrument of appointment, or a copy of it, is lodged.

As a result of this section, it has been suggested that a Custody Deed for the purchase of land in Queensland, should include a clause that provides that the Custodian is purchasing the property as agent for the superfund trustee. We have not reviewed any Custody Deeds that include an agency clause for the purposes of section 22(3) of the Duties Act. However, we anticipate that such a clause would simply specify that the Custodian is directed to purchase an acquirable asset as agent for the superfund trustee.

Our concerns

Our concern with this approach is that an agency clause may not achieve what is intended. The purpose of an agency clause is to satisfy the Queensland Commissioner for State Revenue (Commissioner) that the arrangement between the SMSF trustee and the Custodian under the Custody Deed meets the requirements of section 22(3). That is, that the SMSF trustee has appointed the Custodian to purchase dutiable property as the superfund trustee's agent.

However, the Commissioner will not be satisfied merely by words in the Custody Deed alone. In Public Ruling DA22.1.1 (Ruling), which concerns section 22(3) of the Duties Act, the Commissioner states:

When determining whether s.22(3) of the Duties Act has application, the Commissioner is required to consider all of the relevant facts of each case.

Among the material the Commissioner requires for an assessment is a "written outline as to all the other relevant facts and circumstances which clarify the nature of the agency relationship [our emphasis]".

Important among the relevant facts will be, regardless of whether or not a Custody Deed contains an agency clause:

• Under the Original Transfer, the Custodian purchased the dutiable property as trustee for the SMSF trustee — this is essential to satisfy the requirement of section 67A(b) of the SIS Act; and
• Under the Ultimate Transfer, the Custodian transfers the dutiable property to the superfund trustee in its capacity as trustee under the Custody Deed, not as agent.

Can a person be a trustee and an agent at the same time?

Agents and trustees are both "fiduciaries". This means the duties an agent owes are very similar to the duties a trustee owes to a beneficiary. However, despite having similar duties, agents and trustees fulfil different roles:

• A trustee's role is to hold legal title to property and to deal with that property for the benefit of the beneficial owners of the property.
• An agent, on the other hand, does not necessarily hold legal title to the principal's property. Generally, an agent is provided with the authority to deal with the principal's property on the principal's instructions. If there is an absence of instructions or the agent has a discretion, then the agent must act in the interests of the principal[1].

It is possible for someone to be a trustee and an agent at the same time. This occurs when an agent receives property as a consequence of his or her activities as agent. In fact, an agent who purchases property for the principal in the circumstances that are contemplated in section 22(3) of the Duties Act will hold legal title to the property on trust for the principal.

However, in determining whether section 22(3) applies to a transfer of dutiable property, the Commissioner will need to be satisfied that the transferor is transferring the dutiable property to the transferee as a result of the agent's role as agent.

In an Ultimate Transfer after the limited recourse loan is repaid, the Custodian will transfer the dutiable property in the Custodian's capacity as trustee — this is essential to satisfy the requirements of section 67A(1)(c) of the SIS Act. It will not transfer that property as agent to satisfy the requirements of section 22(3) of the Duties Act. At the very least, it is not certain that section 22(3) of the Duties Act will apply to the transfer.

We contacted the Queensland Office of State Revenue to obtain an official view on this uncertainty. The response confirmed that the fact that the transfer was being effected by someone as trustee may mean that the exemption in section 22(3) will not apply. This was regardless of whether a Custody Deed included a reference to agency.

Approach 2: leave the asset in the custodian's hands — so there is never the "ultimate transfer"

The approach

The simplest way to ensure there is no duty liability arising from an Ultimate Transfer is to avoid it altogether — that is, don't transfer the dutiable property from the Custodian to the superfund trustee. Instead, the Custodian can retain the dutiable property until it is time to sell it. Once the property is sold, the Custodian can pay the proceeds of the sale to the superfund trustee in cash. This transfer will not be subject to duty.

The ATO's view

Unfortunately, this solution itself is not without its problems. The ATO has recently indicated its view that an SMSF trustee's interest in a trust established for the purposes of section 67A(1) of the SIS Act will be an in-house asset if the Custodian continues to hold the relevant asset after the loan has been repaid.

This is the subject of a separate ClearLaw article for this month, which you can view here.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.

More Cleardocs information on SMSFs

Order SMSF related document packages

Set up an SMSF

Update an SMSF deed

Set up an SMSF pension

Arrange SMSF borrowing lending docs:

• for when the lender is a bank
• for when the lender is a related party

Set up an SMSF corporate trustee

SMSF Death Benefit Nomination - binding or non binding

SMSF Death Benefit Agreement - binding and permanent

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[1] Dal Pont, Halsbury's Laws of Australia, paragraph [15-165]