smsf masterclass troy smith review of the spaa conference limited recourse borrowing arrangements...
TRANSCRIPT
SMSF MasterclassTroy Smith
Review of the SPAA conference
Limited Recourse Borrowing Arrangements
Alternatives to borrowing
Agenda
SMSF AssociationWhat took out the award for the strangest asset held inside a SMSF?– A heard of lions leased to a circus– Moon rocks, public toilets, Jimi Hendrix guitar …– And Geelong waterfront bollards
SPAA conference
• Financial System Inquiry– Limited Recourse Borrowing Arrangements– Drawdown phase
• Tax white paper– Tax concessions on super– Election promise to leave super untouched
SPAA conference
• ATO, ASIC, APRA & Treasury– 10 minutes of fame– ATO: Compliance. High ‘net worth funds’.– ASIC: LRBAs and Property (spruiking).– APRA: SuperStream. Industry ‘report card’.– Treasury: Tax paper. Contribution of tax dollars from superannuation.
SPAA conference
Last but not least ….
• Superannuation is to provide retirement benefits– “Lofty statement” was repeated by the industry body and various
Government representatives
SPAA conference
Borrowing inside super
Regulatory changes
Acquisition of assets from a related party
Repair, maintain, improve
Borrowing in super
Limited recourse borrowing arrangements
• Possible from 24th September 2007
• Subject to considerable change
• But how much change?
Borrowing in super
Limited Recourse Borrowing Arrangements commence 24th September 2007
GST Ruling 2008/3: GST and Bare trust technical amendment
ATO ID 2010/169: Refinancing is permitted
ATO ID 2010/170: Personal guarantees are possible
ATO ID 2010/172: Joint ownership of an asset between two funds is not possible
ATO ID 2010/184: Interest capitalisation is possible
StrongerSuper 2010: Recommends a review of LRBA in 2 years
SMSFR 2012/1: Single Acquirable / Maintain or improve
ATO ID 2012/162: Commercial terms
NTLG June 2012: 0% interest rates
ATO ID 2014/39: Beware of non-commercial terms
ATO ID 2014/40: Beware of non-commercial terms
FSI (December 2014) : David Murray proposes ban on borrowing in super
Borrowing in super: Regulatory environment
Exercise caution with related party loans
ATOID 2014/39: Related party loan. LVR of 100%. Term 20 years. Interest rate 0%. Repayment at end of term. No guarantee or security placed over the loan.
ATOID 2014/40 Related party loan. LVR of 80%. Term 15 years. Interest rate 0%. Repayment in monthly instalments. No guarantee or security placed over the loan.
Commissioner takes a dim view of 0%loans, 100% LVR, repayment at end of term, lack of guarantees …
Recent changes
Who is she?• Astute business person• Strong ideas about investments• Long term relationship with her accountant
Case study – Miranda Priestly
Refer to the workbook for the details of the case study. Refer to “Case study 1 – Acquiring an asset”
Acquiring assets
Select the correct statement
1.The SMSF can acquire any residential property via a LRBA.
2.The SMSF can acquire a residential property via a LRBA, provided that it is acquired from an unrelated party.
3.The SMSF can acquire a residential property via a LRBA, as a ‘company’ is not considered a related party.
4.There is insufficient information to answer the question.
5.I don’t know – better call technical
A related party is defined in the SIS Act as:• a member of the fund• a standard employer-sponsor of the fund• a Part 8 associate of a member or standard employer-sponsor of the fund
In general terms, a Part 8 associate would include a trustee, a relative of the member or trustee, or any entities which they ‘control’ either individually or as a group. An entity would include any individual, company, partnership or trust.
Control of a trust generally occurs where a related party/ies has a fixed entitlement to more than 50% of the capital or income of the trust (or can appoint or remove a trustee of the trust, or majority of trustees act in accordance with a related party).
Related Party
Using a LRBA doesn’t permit trustees to avoid the rules• Acquisition of assets from a related party (Section 66 of the SIS Act)– Exceptions includes:– business real property acquired at market value– listed securities acquired at market value– a life insurance policy (other than a policy acquired from a member or relative)– units in a widely held unit trust– in-house assets acquired at market value where the acquisition of the asset would not
result in the level of in-house assets in the fund exceeding 5% of the fund’s assets
Acquiring assets
Remember Miranda? The fund has a LRBA which has been used to acquire a vacant block of land. Can the SMSF build a house on the vacant block of land?
1. No, the SMSF can not build on the vacant block of land whilst it is subject to an LRBA. 2. Yes the SMSF can construct a home on the vacant land, provided that the fund doesn’t borrow. 3. Yes the SMSF can construct a home on the vacant land. The SMSF can borrow to construct the
residential property (under a new LRBA).4. Yes the SMSF can construct a home on the vacant land. The SMSF can borrow to construct the
residential property (under a refinance of the existing LRBA).
Maintain, Repair, Improve?
SMSF trustees must ensure that an improvement (or any other change) does not result in a single acquirable asset becoming a different asset(s).
Examples of changes resulting in a different asset• a vacant block is subdivided into multiple titles• a house is demolished by fire and replaced with 3 strata titled units
Examples of when an asset is still the same asset• an extension to add 2 bedrooms• an extension consisting of an outdoor entertainment area, the addition of a garage shed and driveway
Maintain, Repair, Improve?
SMSF trustees must ensure that an improvement (or any other change) does not result in a single acquirable asset becoming a different asset(s).
Maintaining an asset: Maintaining an asset involves the prevention of damage or deterioration to an asset and ensures the functional efficiency of the asset is maintained in its current state. Repairing an asset: Repairing an asset restores the functional efficiency of the asset to its former state without changing its character. Improving an asset: A trustee of an SMSF cannot use borrowings under an LRBA to fund improvements to a single acquirable asset. Improving an asset increases the value and functional efficiency of the asset through new additions and features that substantially alter the nature of the asset. These improvements would provide benefits over and above the value of a general repair.
Maintain, Repair, Improve?
Example: Renovation of propertyA SMSF enters into an LRBA to purchase a residential property. The fund renovates the property, adding a second storey to the house using borrowings under the LRBA.
The addition of a second storey improves the value of the asset, and as borrowed money was used, the arrangement no longer satisfies the requirements of the LRBA provisions. If the renovations had been funded from a source other than borrowings, the improvements would be permissible.
Sourced from ATO SMSFR 2012/1
Maintain, Repair, Improve?
Miranda has been mildly impressed with your knowledge – but now she has a tricky question.
One last question
Miranda has one last question. Refer to the section of the workbook “Proper serious technical question” for the details
Proper serious technical question
Select the correct statement
1. You can not make loan repayments with an in-specie transfer. A loan repayment is required to be made using money.
2. You can make loan repayments with an in-specie transfer. You can use any asset of the fund, including those subject to a LRBA.
3. You can make loan repayments with an in-specie transfer. However you can not use any asset of the fund that is subject to a LRBA.
Abolition of borrowing inside super
If LRBA’s are abolished, what alternatives are there?• Geared investment trusts• Instalment warrants (or will they go as well??)• Related non-geared units trusts (13.22c)• Tenants in common
The future of LRBA’s
These trusts are commonly referred to as 13.22C unit trusts after the section of legislation to which they relate, and are required to have the following characteristics:• The trust does not lease assets to a related party with the exception of business real property• There are no borrowings or charges over the assets• The trust does not invest or loan money to other entities (other than an approved deposit taking
institution)• The trust does not own assets that were acquired from a related party after 11 August 1999, other
than business real property• The trust does not own assets that were at any time assets of a related party in the last 3 years
(excluding assets acquired before 11 August 1999)• The trust does not conduct a business • All transactions are conducted on an arm’s length basis
Related non-geared trust
Trustees of the SMSF want to acquire a property• No s66 breaches• A 13.22c unit trust is established• SMSF owns some of the units• Individual owns the remainder of the units
– Individual uses a line of credit to invest into unit trust• Unit trust purchases a property
Alternative borrowing strategy
Alternative borrowing strategy
$1,000,000
13.22c trust
SMSF$600,000
Line of credit
$400,000
Alternative borrowing strategy
Finance • LRBA generally requires bare trust with corporate trustee. Personal guarantees are common resulting
from restrictions with limited recourse requirements. • 13.22C + LOC doesn’t require corporate trustee. Finance is (often) secured against main residence.
Insurance • LRBA: Cross insurance no longer possible for new arrangements from 1 July 2014. Non-super
insurance policy could be used, and contribute proceeds to reduce insurance debt. • 13.22c + LOC can use an ordinary life insurance policy to provide coverage. Life/TPD/Trauma.
Alternative borrowing strategy
Alternative borrowing case studyJimmy wants his SMSF to purchase additional units from him. Refer to the case study for more information.
Select the correct statement
1. An in-specie transfer of units is possible, however the SMSF can not purchase the units from Jimmy due to Section 66
2. Section 66 prohibits an acquisition of assets from related parties, therefore the SMSF can not purchase the units from Jimmy.
3. Section 66 prohibits an acquisition of assets from related parties, one exception relates to certain in-house assets, therefore the fund can acquire the units
4. The SMSF can acquire the units as there is no change in beneficial ownership
Mark wants to pay the interest cost of a LRBA using an in-specie transfer. Refer to the workbook for the details. Is this possible?
Related non-geared unit trusts
Intergenerational transfer of assets
Ben and Barbara, your favourite clients, have a few questions. Refer to the workbook for their case study. • Barb says, “Assuming that we both have passed away, and the property is in their SMSF. Peta is
left running the fund. What happens to the property? Can the investment property remain in the SMSF? Or does the property need to be sold?”
• Ben asks “What are the taxation implications? Does CGT apply? Are there death taxes in super?”• Barb says, “What are the stamp duty implications?”• You begin the wonder, are there are exemptions or strategies to reduce stamp duty?
Intergenerational transfer of assets
Barb says, “Assuming that we both have passed away, and the property is in their SMSF. Peta is left running the fund. What happens to the property? Can the investment property remain in the SMSF?”
• Probably not as the SMSF would need to have sufficient liquid assets to pay out a death benefit.
• Additional contributions could be used to cash up the fund– Long term planning -> Concessional contributions– Short term fix -> Non-concessional contribution
Intergenerational transfer of assets
Barb says, “Assuming that we both have passed away, and the property is in their SMSF. Peta is left running the fund. What happens to the property? Can the investment property remain in the SMSF?”
• An in-specie death benefit lump sum can be paid• Can an in-specie death benefit pension be paid?– No – the beneficiary can not commence a DBP– Pension payments can not be paid as an in-specie transfer
Or does the investment property need to be sold?• Not necessarily. In-specie death benefit lump sum is possible.
Intergenerational transfer of assets
What are the taxation implications? Does CGT apply?• It depends. Was the SMSF paying a pension at the time of death?– If not paying a pension– then capital gains applies– If paying a pension – then the ECPI continues as long as the death benefit (lump sum or pension)
is paid as soon as practicable (TR2013/5 & ITAA Super Measures No1 Regulation 2013)
Are there death taxes in super?• Death benefit lump sum will be taxable subject to the proportioning rules.
– Taxable component is taxed at 15% + Medicare Levy– Tax free component is received tax free
Intergenerational transfer of assets
What are the stamp duty implications of transferring a property into the fund?Transfer of property into a SMSF may be exempt from stamp duty, or receive considerable exemptions (NSW, Victoria, WA, but not Queensland, ACT, SA, NT or Tasmania)
What are the stamp duty implications of transferring a property out of the fund?Transfer of property out of a SMSF is generally a dutiable transactionOne strategy exists to reduce stamp duty – 13.22c trust – NSW, Victoria, WA (But not SA, Queensland, ACT, NT or Tasmania which may be subject to
stamp duty if the acquisition results in a ‘land interest’.
Intergenerational transfer of assets
Intergenerational transfer of assets
13.22c trust
SMSF
What are the stamp duty implications? • Transfer of property into a SMSF may be exempt from stamp duty, or receive considerable
exemptions (NSW, Victoria, WA, but not Queensland, ACT, SA, NT or Tasmania)• Transfer of property out of a SMSF is generally a dutiable transaction
Intergenerational transfer of assets
• Limited recourse borrowing arrangements –is the end in sight?
• Alternatives to borrowing inside super
• Intergenerational transfer of assets
Wrap-up
