Self-managed superannuation funds may end up paying extra stamp duty, capital gains tax and be penalised by the Australian Taxation Office if borrowing transactions don’t comply with the superannuation law. Under the rules, “limited recourse borrowing arrangements” allow a SMSF to borrow money to buy assets. The asset must be a single acquirable asset and be held by a separate holding trust until the loan is paid off. The money borrowed can be used for repairs and maintenance but not to improve the asset. When the loan is repaid, the asset must be transferred from the holding trustee to the SMSF trustee. SMSF trustees are making mistakes on the timing •of contracts, buyer details on the contract, paying the deposit from their bank account and with incorrect wording on legal documents.
Timing of the contract
Stamp duty rules differ in each State. Therefore it is important that transactions are executed properly. In NSW, Tasmania or the ACT, the contract must be signed and dated before the holding trust deed. Otherwise trustees pay stamp duty on the holding trust deed as a “declaring of trust” as well as on the contract. If the property is in SA, Queensland or the NT, the holding trust deed must be signed and dated before the contract. In WA or Victoria, I recommend SMSF trustees seek legal advice on this issue.
Buyer details on the contract
The wording on the contract differs in each State. In WA, the word “for” must be used between the holding trustee and SMSF trustee names. In NSW, Victoria, Tasmania, ACT, SA and Queensland, the purchaser should be the name of the holding trustee only and there should not be any other wording such as “as trustee for the holding trust” or “as trustee for the SMSF”. In NT, the wording needs to be very specific. In this case, “Holding Trustee pty Ltd as trustee for Name of Holding Trust as bare trustee for SMSF Trustee pty Ltd as trustee for Name of SMSF”. Again, I recommend you seek legal advice.
Paying the deposit
All money, including the deposit, must be paid from the SMSF’s bank account. The SMSF trustee needs to be able to show that all money for the purchase of the single acquirable asset came from the SMSF in order to be eligible for concessional stamp duty. An SMSF may end up paying more stamp duty if the deposit money came from another source.
Wording on documentation
Errors have been made by SMSFs buying house and land packages. It is most important that the single acquirable asset is identified up-front as a single-title vacant block of land along with the construction of a house on Thailand before settlement occurs. It is ‘also important that the LRBA states that the single acquirable asset is at all times a complete house and land package; security for the loan is at all times over the land and completed house, and that it allows drawdowns for the deposits, progress payments and settlement. If the wording is not right, the tax office can view the land and the house as two assets and that breaks the super law. Drawing up a LRBA requires specific wording. It is best that SMSF trustees seek an experienced mortgage broker and a lawyer who knows how to draft personalised documentation. I recommend that SMSF trustees do not trust financial institutions to provide all the documentation on a loan like this. Lenders are protecting their interests but you need to make sure you have the right documentation with specific wording to meet the requirements of the super law. If the LRBA structure does not strictly comply with the super law, the only way for SMSF trustees to unwind the transaction is to either fully repay the loan or remove the single asset acquired from the SMSR The tax office may also consider removing the compliance status of the self-managed super fund as well as disqualify trustees of the SMSFs. Getting . LRBA structures wrong can be costly.