Debt in a Self-Managed Superannuation Fund is generally not permitted. SMSFs are conservative fortresses for your retirement money. Prohibiting debt reduces risk. See the Explanatory Memorandum to the Superannuation Legislation Amendment Bill (No. 4) 1999:
Superannuation funds are generally not permitted to borrow in their own right. This is designed to reduce the risk to retirement income from gearing their assets.
However, the law allows the SMSF to borrow to buy an investment. The is under Part 7 SIS Act. See in particular sections 67A and 67B Superannuation Industry (Supervision) Act 1993. The rules are strict and draconian:
The Custodian Trust is separate to your Self-Managed Superannuation Fund.
The trustee of the Custodian Trust is a company. You build the company first here.
The SMSF wishing to borrow to purchase the investment buys the investment in the Custodian’s name. The Custodian holds the investment as trustee for the Custodian Trust – not the SMSF.
The asset purchased is held on bare trust in the Custodian Trust. This is on behalf of the SMSF. The SMSF owns the investment beneficially. But the Custodian holds only the legal title to the investment. The investment is in the Custodian’s name. But the true or beneficial owner is the SMSF. The SMSF may take the asset from the Custodian Trust later. This is usually when the loan is repaid.
A separate Custodian Trust is established for each investment. You cannot hold multiple assets in the same Custodian Trust.
When purchasing the asset using borrowings, the asset is purchased in the Custodian’s name.
The Custodian Trust and the document acquiring the investment may both need to be lodged for stamping in the relevant State.
The Custodian purchases the asset as trustee of the Custodian Trust. However, it is purchasing the asset beneficially for the SMSF.
It is the SMSF who borrows from the Lender to fund the purchase. The Custodian (as the mere legal owner of the asset) provides the security (e.g. if property a mortgage in favour of the Lender). This secures the SMSF borrowing.
The loan is ‘limited recourse’. This means that the SMSF is not exposed to the debt. The only security available to the Lender is the investment held by the Custodian in the Custodian Trust.
The Custodian Trust provides the investment as security for the Loan made to the SMSF. This is the only asset that is provided to the Lender as security for the loan made to the SMSF.
The Lender’s right to recover is limited to the asset purchased in the Custodian Trust. If the SMSF defaults on the Loan the Lender can only take the asset in the Custodian Trust. Lenders have no recourse to any other assets owned by the SMSF.
The superannuation law requires that the SMSF has the right to eventually transfer legal ownership of the investment. This is from the Custodian. This is after making the instalment payments. (Note: at all time the SMSF has ‘beneficial’ ownership)
Upon full payment of the Loan, the asset’s legal ownership transfers from the Custodian to the SMSF’s Trustee.
The ATO confirms that there is only nominal stamp duty and no Capital Gains Tax payable on the final transfer. Obviously the ATO has no jurisdiction over State stamp duty, so its view on the matter is of little value.
Suffice to say that Custodian Trusts prepared by Legal Consolidated, such as this one, have only nominal stamp duty and no CGT consequences. This is when it comes time to end the Custodian Trust and transfer the legal ownership of the investment to the SMSF.
The SMSF is the ‘beneficial owner’ or ‘true owner’ of the asset. The Custodian is only the ‘legal’ owner of the asset. The Custodian has no ‘beneficial’ interest in the asset.
Accordingly, the SMSF is taxed on all income from the investment. The SMSF is responsible for paying expenses. E.g. rates, insurance etc.
Your accountant merely adds the outgoings and income of the asset in the SMSF tax return.
Other types of bare trusts you can build on our law firm’s website:
Acknowledgement of Trust – ‘AFTER the Trustee buys’
Gifting Trust – ‘deathbed declaration’
Bare Trust Deed – ‘hide assets you own‘
We are a private taxation and superannuation law firm. If you need help structuring the loan speak to your financial adviser, accountant or lawyer. If they need help they can contact us directly.
Adjunct Professor, Dr Brett Davies
Legal Consolidated Barristers & Solicitor
National Australian law firm
Mobile: 0477 796 959
Direct: 08 6389 0400
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