What does “absolute entitlement” mean and how to avoid paying stamp duty and CGT twice under a limited recourse borrowing arrangement?
When preparing the loan documentation for a limited recourse borrowing arrangement, trustees must be mindful of the concept of “absolute entitlement”. If the documentation is not drafted meticulously, the bare trust (custodian) may be deemed a “separate trust”, in which case it owns the property outright and not as trustee for the self managed superannuation. If the bare trust is deemed a “separate trust”, when the loan is repaid and when the corporate trustee of the bare wants to transfer the property to the SMSF trustee (which is a separate trust), the SMSF may be liable for stamp duty and the bare trust may be liable for CGT – since the bare trust is “selling” the “property which it owns” to the trustee of the SMSF. In essence, one trust selling to another trust. Hence, it is very important the bare trust deed is drafted in such a manner that it is not deemed to be a “separate trust”.
To pre-empt such an event from happening – being the double payment of stamp duty and payment of CGT, the bare trust deed and related documents should clearly establish the fact the bare trust is a holding trust and the asset is held “in trust for” the trustee of the SMSF. This is achieved by making a distinction between who the “legal owner” of the property is, and who the “actual owner” is in the bare trust deed and to justify to the borrowing exception under Sec 67 A & 67B of SIS Act. While loan is in place, the asset is held “on trust” by the trustee of the bare trust.
Reference should be made to Sec 106-50 of the Income Tax Assessment Act 1997 regarding where the beneficiary is absolutely entitled to the asset as against a trustee of a trust. Taxation ruling 2004/D25 provides further insights into when the commissioner considers a beneficiary to be absolutely entitled to a CGT asset of the trust. Where an entity is considered to be absolutely entitled to an asset, it will be treated as the relevant taxpayer in respect of the capital gains tax (CGT) provisions, when the asset is eventually sold or disposed of.
Where the property is held in trust by the trustee of the property custodian trust and the limited recourse borrowing arrangement is in place, the property must not be transferred to the trustee of the self managed superannuation. If the transfer does occur, it may be in contravention of Sec 67 of the SIS Act and regulation 13.14 (prohibition from placing a charge over an asset) and can render the fund non complying. This will result in a loss of tax concession.
When drafting the custodian (bare trust) deed and other relevant documentation, care must be provided so as not to prohibit this transfer from the trustee of the custodian to the trustee of the self managed superannuation, at any time. Where such a prohibition exists which limits the transfer “at any time” – then the self managed superannuation fund is not deemed to be “absolutely entitled” to the investment property of the custodian trust. In which case the bare trust is essentially a separate trust.
Where the property custodian trust (bare trust) is deemed by the commissioner as a “separate trust,” CGT will be payable by the custodian trust when the investment property is transferred to the self managed super. In addition, the self managed super may pay stamp duty on the said transfer as it is deemed to be a purchaser.
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