WEBINAR: Building an Investment Strategy


The final SMSF Academy webinar for 2012 will take a look at the important elements in Building an SMSF Investment Strategy.

Join me for this one-hour session, where we will explore the:

  • Stronger Super reforms impacting a fund’s investment strategy
  • Framework for developing investment strategies
  • Implementation of investment strategies
  • Requirements to appropriately monitor and review an investment strategy; and
  • Other investment requirements

Webinar details:

  • Date: Wednesday, 12 December 2012
  • Time: 11am, AEDST

Find out more and register here

SPAA CPD points available for attendees

extra bonus

Attendees will receive a copy of the revised SMSF Investment Strategy template, which includes the latest changes from the Stronger Super reforms.

GUEST POST: Understand the state jurisdictions when establishing LRBAs


the-law

The ATO’s recent release of Taxpayer Alert – TA 2012/7, provide trustees and professionals with a timely reminder about acquisition of property using a Limited Recourse Borrowing Arrangement (LRBA) and also through related unit trusts.

Some of the examples of concern raised by the Commissioner in TA 2012/7 surrounding LRBAs suggest individuals are either:

  • oblivious to the appropriate legislative provisions; or
  • not seeking the appropriate advice prior to entering into the property acquisition.

Of most interest from the features that concern the Commissioner, was the following statement:

“The trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset is signed” [Arrangement 1, item (c)]

Whilst this may be a true statement for some state jurisdictions, this is not necessarily the case across all States and Territories of Australia.  For example, Victoria’s conveyancing and stamp duty laws do not prohibit nor penalise parties when they incorporate and establish a Trust in contemplation of being the nominated party for a property transaction that is already on foot.  It is commonplace in Victoria for parties to be nominated to complete a property acquisition to which they were not the original party. Usually, the initial Contract of Sale provides a nomination provision. If this is not the case, there is a statutory provision that enables a nomination of the purchaser of a property in Victoria within 14 days of the date of settlement.  Any nomination is subject to the nominated party completing the transaction. If this not be the case the original purchaser is still liable to settle.

Additionally there is no stamp duty penalty if there is a nomination of a substituted purchaser that does not equate to a second sale.

The fact that the Custodial Trustee and the Bare Trust has not been established prior to the execution of the Contract for the property that is eventually acquired by the SMSF as law would be irrelevant in Victoria.

With a LRBA via nomination adhering to all of the provisions of section 67A & 67B of the SIS Act, it is difficult to determine what offends SIS or the ATO in respect of such arrangements?

The prohibition described by the ATO where the Custodial Trustee and the Bare/Holding Trust has not been established prior to the execution of the contract may in fact offend some State stamp duty provisions that would lead to double Stamp Duty.

The “lore” described by the ATO where the Custodial Trustee and the Bare Trust has not been established prior to the execution of the Contract may not be found offensive in Victoria.  I would submit that the Victorian courts would question the ATO’s motives by making such a statement.

Only time will tell, but invariably frightened parties will shy away from when a good real estate investment opportunity presents itself to a SMSF.

Written by Ian Glenister, Solicitor

Legal Officer & Co-founder, The SMSF Academy

Prevailing market conditions can pose problems in acquiring shares using LRBAs


investors

Whilst most of the attention with limited recourse borrowing arrangements (LRBAs) has centred around property transactions, there has been a need to clarify a range of issues on other acquirable assets, in particular assets allowable as a collection of identical assets under the definition of a single acquirable asset (SAA).

It’s not uncommon when placing an order of shares that there may be insufficient volume at a particular price to acquire shares or units.  This is particularly common where the shares are to be acquired at the prevailing market price.  This results in the single order being ‘filled’ over multiple share prices or even different dates.   This however poses a problem for those undertaking any share acquisitions using a limited recourse borrowing arrangement, because of the strict interpretation of a collection of assets” within the single acquirable asset as defined within s67A(3) of the SIS Act.

The question was asked of the ATO recently (via National Tax Liaison Group (NTLG) Superannuation Technical sub-group, September 2012) as to whether a single order of shares filled over multiple prices or dates will still meet the definition of a single acquirable asset.

To understand the issue, let’s consider the following example:

ABC Super Fund enters in a LRBA to acquire #42,500 shares in NewCo Limited at the prevailing market price. This single order is undertaken by the trustees through their CommSec account.  Due to the share volumes available at the time of the order and movement in the prevailing market price, the purchase of the shares were completed in three tranches:

  • 01/10/2012 – #30,000 @ $4.70
  • 01/10/2012 – #10,000 @ $4.72
  • 02/10/2012 – #2,500 @ $4.67

Have we got a problem?

It is important to note that the policy intent around the changes introduced on 7 July 2010 were to prevent borrowing arrangements over multiple assets in which may permit the lender to choose which assets are sold in the event of default.   Whilst a strict interpretation of s67A would mean this transaction would fail as a single acquirable asset, the ATO has stated that in circumstances such as these, they are prepared to ignore short delays in fulfilling a single on-market order to purchase shares or a single on-market order at the prevailing market price which might result in some shares being acquired at different prices.

For the trustees of the ABC Super Fund, the ATO would allow these this single order to be filled over multiple transactions, given the short timeframe to fulfil the order (based on the prevailing market conditions).

Whilst providing a logical outcome for fund trustees, the Regulator has also made it abundantly clear that it will not allow trustees to embark on a course of action to accumulate or sell down shares as an acquisition of a ‘single acquirable asset’.

Do you see much activity with LRBAs to acquire assets other the property?

The ASIC game-changer for SMSF auditors


The next few months starts a transformation for more than 12,000 SMSF auditors, with ASIC registration to open to become an Approved SMSF Auditor.  This registration is mandatory for all SMSF auditors to continue to conduct self managed super fund audits post 1 July 2013.

With about 50% of the SMSF auditors currently auditing 10 SMSFs or less each year, the months ahead will provide some current auditors with “food for thought” about whether they should continue to operate within the sector.  It is anticipated that a significant proportion of the existing auditors will no longer be a part of the industry from 1 July 2013.

The concerns around low-level auditors having the sufficient skills and competency to conduct an appropriate SMSF audit has been discussed and debated for some time… however, the acid-test moving forward begins from 31 January 2013, when registrations commence for the new approved auditor regime.

For those individuals auditing less than 20 funds, this will require the completion of an exam, which will pit their knowledge and judgement against key areas of undertaking an SMSF.  For those auditing 20 funds or more, a streamlined pathway is provided for registration, recognising that a minimum level of competency has been reached to conduct an SMSF audit.  Many in the industry will argue that this level is probably too low…

Regulation of SMSF auditors will see ASIC and the ATO play a dual role in managing SMSF approved auditor sector.  The ATO will continue to “police” regulation of the sector, with ASIC to maintain and enforce:

  • the independence principles of APES 110: Code of Ethics for Professional Accountants;
  • the applicable auditing and assurance standards; and
  • competency standards

ASIC has recently launched an SMSF auditors page, which provides further valuable information for fund auditors and trustees who may wish to search the register for approved SMSF auditors from 31 January 2013.

Alarms bells ringing with ATO around property investing in SMSFs


After only just discussing the regulatory focus by ASIC on SMSFs and property investments, we have seen further regulatory “alarm bells” ringing through the ATO’s release of taxpayer alert, TA 2012/7.  A Taxpayer Alert is an “early warning” of significant new and emerging higher risk tax and superannuation planning issues or arrangements that the ATO has under risk assessment, or where there are recurrences of arrangements that have previously been risk assessed.  With the growing amount of ‘hype’ in the use of these type of strategies, the alert is a timely reminder to ensure such arrangements comply with the strict nature of superannuation law.

It is often lost in the conversation, that borrowing is ordinarily prohibited in superannuation.  Limited exceptions apply, with the ability to enter into a limited recourse borrowing arrangement for prescribed purposes.  The specific purpose of the borrowing must be for the acquisition of a ‘single acquirable asset’.  To say ‘near enough is good enough’ simply won’t cut it when it comes to compliance with these requirements.  Failure to comply with sections 67A & 67B of the SIS Act, will mean that any maintenance of the loan will be in breach of the borrowing provisions.  With an inability to sell a brick-at-a-time, the unwinding of these arrangements can be difficult, and potentially expose the fund to a significant loss on a forced sale.

What problems are the ATO seeing with property investments using LRBAs?

  • The borrowing and title of the property is held in the individual’s name and not in the name of the trustee of the holding trust.  The SMSF has paid the deposit and ongoing repayments;
  • The title of the property is held by the trustees of the SMSF, not the trustee of the holding trust;
  • The trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset signed;
  • The SMSF acquires residential property from a member;
  • The acquisition comprises two or more titles and there is no physical or legal impediment to the two titles being dealt with, assigned or transferred separately; or
  • The asset is a vacant block of land, with the intention to construct a house on the land.  The land is transferred to the holding trust prior to the house being built.

These problems throw up a whole range of compliance concerns, including:

  • potential breach of the sole purpose test in section 62 of SISA;
  • failure to comply with section 67 which prohibits a SMSF from borrowing money or maintaining a borrowing;
  • the acquired asset not meeting the single acquirable asset definition under section 67A(2) as it comprises two or more proprietary rights;
  • the acquirable asset is subject to a charge which would prohibit the fund from borrowing money or maintaining a borrowing of money under section 67A(1)(f); and
  • where the title is incorrectly held in the name of the individual and not the trustee of the holding trust, the deposit and/or loan repayments may breach the payment standards, effectively drawing on preserved benefits prior to meeting a cashing condition.

As highlighted by the Commissioner, there is a lot of talk about the benefits of limited recourse borrowing in super, but not a lot about the risks.  It is important to remember, responsibility ultimately rests with the trustees to comply with superannuation law.  Ensuring that the fund’s governing rules allow for borrowing (and assets to be held in a custodian arrangement), and that the decision is consistent with the fund’s investment strategy are all critical elements to ensure compliance.  Failure to do so, can render the fund non-complying, effectively meaning the fund is subject to a 45% tax rate which is applied to its income and market value of fund assets (other than undeducted contributions).  Furthermore, civil and criminal penalties could also apply.

Related trust arrangements

The taxpayer alert also highlights a range of concerns around the use of related unit trust structures to acquire property.  Once the ‘darling’ of the SMSF sector, the use of unit trusts has somewhat diminished with the inability to typically leverage inside these trusts, nor put a charge over the assets of the trust.  These strict requirements are outlined within SIS Regulation 13.22C.

The ATO concerns with these arrangements appear to stem from investments that are failing to adhere to the requirements of SISR 13.22C and subsequently become in-house assets under section 71 of SISA, thereby counting towards the allowable 5% limit.

It is not to say these strategies don’t provide some fantastic outcomes for individuals, but the decision process to establish a SMSF and consider acquiring property is not something to be taken lightly.  These alerts and investigations by the Regulators highlight the need for “buyer-beware” when it comes to property in SMSFs.

 

(C) The SMSF Academy 2012
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