Michael Hallinan from Townsends Lawyers explains the rules around changing your holding trustee in a LRBA.
Those familiar with limited recourse borrowing arrangements (LRBA) will appreciate that the property, once purchased, is held by a so-called ‘bare trustee' that the Australian Tax Office (ATO) prefers to call a ‘holding trustee'.
The holding trustee is usually a passive entity that simply holds the property title while the loan is being repaid.
However, some clients may find that a few years into the LRBA the entity appointed to act as the holding trustee needs to be replaced or substituted.
Say if Bonnie and Clyde have purchased a property with their SMSF using limited recourse borrowing, where the original finance for the property is with a lender which uses its own holding trustee.
Now, if in a few years from their initial purchase, Bonnie and Clyde decide they want to refinance the loan over the property and change lenders, or themselves lend to their SMSF, the property will need to be transferred to a new holding trustee.
Apart from ensuring that the refinancing of the loan is properly taken care of, Bonnie and Clyde need to ensure that they consider the following:
- A review of the current holding trust deed (and other documents) to determine how the lender's holding trustee can be replaced by the new holding trustee;
- Preparing and executing a deed to effect the appointment of the new holding trustee and the retirement of the lender's holding trustee;
- Whether there is a requirement to register this deed on the General Register of the relevant State;
- How to meet the requirements to obtain concessional stamping on the transfer from the lenders' holding trustee to the new holding trustee at the relevant Duties Office;
- Registration of the transfer with the relevant Titles Office (along with the discharge of the previous mortgage and registration of the new mortgage, if relevant);
- Written resolutions of the fund trustee relating to the appointment of the new holding trustee and the transfer;
- Written resolutions of the new holding trustee relating to its appointment as the holding trustee and the transfer;
- Ensuring that a formal direction from the fund trustee to the new holding trustee is given to allow the new holding trustee to execute the documents required for the Transfer;
- Determining what documents are needed to assign the current lease from the lender's holding trustee to the new holding trustee; and
- Determining what notification must be provided to the managing agent (if any) and lessees in respect of the transfer.
As with any documentation for LRBAs, Bonnie and Clyde must ensure that all documentation is correctly prepared and executed in order to maintain the compliance of the arrangement.
They also need to ensure that the transfer is fully completed so that the new holding Trustee is the registered proprietor of the property.
What rent is being charged on the property?
This is crucial for commercial property with a related-party tenant. (In-house asset rules would be triggered if a related party tenant occupies or uses a residential property at less than market rates.)
The SIS Act (s109) says (in board terms), that when related parties deal with the fund, it must be at arm's length.
The rent should be no more favourable to the tenant than if the landlord was an unrelated party. An inflated rent above market value will also fail the arm's length test and could result in an assessment that deems contributions are being made to the fund.
Unwinding the LRBA when the loan has been repaid
It is important to stay aware of the balance of the loan.
When it has been paid out, the property must be transferred from the holding trustee to the fund trustee as soon as practicable.
Alternatively the trustee could arrange for the property to be sold to a third party.
If no money is owing on the property and it remains in the holding trust, it is no longer considered to be part of the LRBA.
Without the LRBA exemption, the holding trust now becomes a related party trust and you will encounter in-house asset issues.
While ever the property is part of the LRBA, the holding trust is not treated as a related trust and so the value of the property is not counted for the purposes of the in-house asset rules.
The treatment of the holding trust as not a related trust arises from a special concession which applies while the LRBA is on foot.
Once the LRBA ceases (because the borrowing has been repaid and there is no debt on the property) the special concession ceases to apply and the holding trust is now treated as a related trust.
As a related trust, the value of the property will now be counted for the purposes of the 5 per cent in house assets holding rule.
This rule provides that if at the next balance date the market value of in-house assets is more than 5 per cent of the total market value of all assets of the fund, the trustee must prepare a plan by which the excess amount of in-house assets (ie, over 5 per cent) will be reduced by way of asset divestment.
The plan must be prepared within 12 months of balance date and must be implemented.
The relevant SIS Act provisions require the plan to be a divestment plan: sufficient value of in-house assets must be sold off so that the market value of in-house assets is reduced to 5 per cent or less.
As most property acquired under LRBAs are relatively large compared to the fund, the requirement to dispose of the excess value of in-house assets will generally mean that the property itself will have to be sold off.
The ATO does not have power to modify the operation of the in-house asset rules, which are civil penalty provisions.
Consequently there are hefty civil and criminal penalties for the intentional or reckless failure to comply with the in-house asset rules.
If the lender is about to be repaid and Bonnie & Clyde wish to delay the time by which title to the property must be sold to a third party or transferred to the super fund, Bonnie & Clyde may wish to re-finance the lender's loan with a related party loan.
Bonnie & Clyde could do this when the loan to the lender has declined to nominal amount (say $1,000) and simply refinance the loan. Refinancing the loan ensures that the LRBA is still on foot and so the in-house asset rules will not apply.
Refinancing must occur before the loan to the lender has been repaid. If the loan to the Lender is repaid, the opportunity to refinance will be lost and any borrowing by the Super Fund in respect of the property will not qualify as a LRBA.
Bonnie & Clyde may wish to re-delay collapsing the holding trustee by repairing the land and transferring title to the super fund if there is any doubt as to whether the transfer of title from the holding trustee to the super fund would not be entitled to concessional stamping.
Michael Hallinan is special counsel at Townsends Business & Corporate Lawyers.
