This came up as a practical question from one of our staff to the head of compliance at We Love SMSF, and it prompted me to write this article so that trustees can gain an understanding of what they would need should this decision arise. Of course, you can come to us for assistance if you need help.
Introduction
As SMSF limited recourse borrowing arrangements (LRBAs) reach completion, many trustees are unsure how to properly wind them up. There are several steps involved in weighing options, strategizing, and documenting the process.
This article focuses on situations where the borrowing has been paid off and the asset is being retained within the SMSF. If the SMSF trustee is selling the asset to a third party, different considerations will apply.
When is an LRBA Ready to be Unwound?
A core feature of an LRBA is that the SMSF trustee borrows money to acquire an asset held on trust, often referred to as a ‘bare trust’. While not all such trusts are technically ‘bare trusts’, we’ll use this term for simplicity.
Key features of LRBAs include the SMSF trustee having a beneficial interest in the asset and the right to acquire legal ownership after making payments. An LRBA is completed when the loan is fully repaid. At this point, the asset is held on trust for the trustee, and there’s a choice to transfer the asset into the name of the SMSF trustee.
Costs Involved in Transferring to the SMSF Trustee
Transferring the asset to the SMSF trustee involves transaction and administrative costs, especially if the asset is real estate, which requires conveyancing.
Stamp duty may also be payable on the transfer. If the initial transaction was properly handled and documented, there is usually a stamp duty exemption in most jurisdictions. However, the requirements for exemptions can be complex, involving statutory declarations and documentary evidence. It’s recommended to consult a stamp duty expert in advance.
Is it Better to Transfer to the SMSF Trustee?
Leaving the asset in the bare trust can save costs and hassle in the short and medium term, thanks to an ATO legislative instrument that prevents it from being classified as an in-house asset.
However, if the goal is to transfer the asset in-specie to members (e.g., upon a member’s death), it might be better to transfer it to the SMSF trustee sooner. Delaying this transfer could result in losing or forgetting crucial evidence needed for a stamp duty exemption.
Additionally, if the SMSF trustee plans to change or improve the asset significantly (e.g., subdividing land or converting residential land into commercial), the asset needs to be transferred to the SMSF trustee first.
How to Unwind the Arrangement
If transferring to the SMSF trustee is desired or necessary, the following steps should be taken:
Seek Expert Advice:
Property Law Advice: Get guidance on potential stamp duty exemptions, which can vary between states and territories. If there’s no duty concession or the transfer might trigger duty, this could be a reason to keep the title with the bare trustee.
SMSF Legal Advice: Understand the impact of the transfer and documentation requirements based on your fund’s governing rules and bare trust agreement. Superannuation law considerations and specific documents may also be needed.
Confirm Loan Repayment:
The SMSF trustee should get written confirmation from the lender that the loan is fully repaid and the mortgage is discharged.
Transfer the Title:
The SMSF trustee should start the title transfer process according to the laws in the relevant state or territory. It’s best to hire a property lawyer experienced with these transactions rather than a conveyancer.
Document the Cessation of the Bare Trust:
An SMSF lawyer should prepare documentation to record the end of the bare trust and any related SMSF changes.
Notify Relevant Parties:
The property lawyer will likely notify relevant parties, such as the state revenue office and local council, about the title change. Advisers and other interested parties should also be informed, including any changes to utility services for leased properties. Ensure the tenant pays rent directly to the SMSF trustee or its agent. The property lawyer should advise on what’s needed to change the landlord from the bare trustee to the SMSF trustee under state or territory laws. A legal document might be needed to assign the lease to the new landlord.
Disband the Bare Trustee:
If a bare trustee company was set up just to hold the legal title, the directors might consider liquidating or deregistering it. Be cautious to avoid premature actions, as reinstating a company can be complex. Liquidation is generally recommended for greater certainty and to minimize future risks.
Transferring property from a bare trustee to an SMSF trustee requires careful planning and following the right steps. Proper execution ensures a smoother transfer and compliance with regulatory obligations. Mistakes can lead to significant penalties, so it’s important to seek expert advice and plan carefully.
So if you are getting close to paying off your SMSF Loan, we highly recommend seeking professional guidance to ensure a smooth transition. You can contact us at either our Melbourne office or our Gold coast offic to book an appointment or even a 15mins chat to get you started.
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