Part II of III
In the first of a series of three articles James looked at the government’s response to the financial inquiry and surmised it was good news with LRBA’s being left on the table, albeit with a new review scheduled for 2018.
In this article he looks at Tax and Super Laws to bring accountants seeking a solution to the Accounting exemption expiry up to date.
Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015
This Act received Royal Assent on 16 September 2015. The intent of the legislation is to confirm the look-through approach to the taxation of income derived from assets held on trust for superannuation funds.
Where a SMSF acquires an asset that is subject to a LRBA, legislation prescribed that the asset must be held on trust for the SMSF. This is generally achieved by establishing a “holding trust”, “bare trust”, “custodian trust” or “property trust” (they all refer to the same trust structure but are named differently by different banks) to hold the title to the asset.
From a taxation perspective, the practice has been to hold the title to the asset in a holding trust, but to treat the income derived from that asset, and capital gains in the case of a disposal of the asset, as income of the SMSF. This new legislation simply confirms this current practice, an exemption to the in-house asset rules is provided for in section 71(8) of the Superannuation Industry (Supervision) Act 1993.
Basically the exemption precludes an asset held on trust, and subject to a LRBA, from being treated as an in-house asset.
Once the debt has been paid, the in-house asset exemption no longer applies. To overcome the need for assets to be immediately transferred to the SMSF on discharge of the debt, the ATO altered the legislation to enable the asset to remain in the holding trust, after the debt is repaid, and still be exempt as an in-house asset – happy days. Why? It may eliminate the need to pay additional stamp duty (depending of the State where the asset is held) by allowing the asset to remain in the holding trust but take care with improvements.
Under a LRBA, the trustees are prevented from making improvements to an asset that is subject to a LRBA. While repairs and maintenance are fine, improvements or changes that result in an asset becoming a “different” asset are prohibited. If the intention is to make improvements to an asset held on trust for a SMSF, improvements should not be carried out until after the loan has been discharged.
As the title to an asset may now remain in the holding trust after the debt has been repaid, any improvements (such as subdividing the asset) should not be made while the title resides in the holding trust.
If the intention is to make improvements to an asset once it is debt-free, the title should be transferred to the SMSF before making such improvements. Failure to do so may result in the improved asset being treated as an in-house asset.
Importantly, if improvements are planned for an asset following the discharge of a LRBA, ensure the title is transferred to the SMSF from the holding trust before any improvements are commenced.
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