don’t want to use an lrba? try these! - amazon s3 · 2016-02-10 · contents reasons we don’t...

Don’t want to use an LRBA? Try these!Clinton Jackson

Senior Associate, Cooper Grace Ward

ContentsReasons we don’t like LRBAs

In-house asset recap

Rules for:

•unrelated trusts•13.22C or ‘ungeared’ trusts•Pre-1999 unit trusts

Using alternative structures to solve common LRBA problems

Other provisions

Reasons we don’t like LRBA’s

Single acquirable asset

multiple assets

developments

improvements

Limited life

One asset only -can’t continue to use

One SMSF investor only

can’t have 2 SMSFs invest in one LRBA

practically can’t have 2 LRBAs (one for each SMSF) invest in single

property

Limited recourse loans

onerous requirements

bank policy

In-house asset rules

in-house assets

Loan to or investment in related party

Investment in related

party/trust

In-house asset rules

Other exemption applies

The trust is a related party or related trust

Question then is whether

Related party/trust

• Member

• Standard employer sponsor

• Part 8 associate of either Related party

• Trust controlled by member or standard employer sponsor

• Effectively a related party that is a trust

• Also check whether trustee is a related partyRelated trust

Unit trust owned 100% by SMSF is a related trust

Related party/trust

Is this an in-house asset?

Unit Trust

Trustee

P1 P2

P1

P2

Is this an in-house asset?• Yes

• No

• Maybe/I don’t know

Alternate Structure 1

Unrelated Unit Trust

Unrelated unit trustThis is not

an in-house asset?

Unit

Trust

Trustee

P1 P2

P1

P2

Provided

No group has more than 50% of units

No group has power to change trustee

No group controls the trustee

Control of unit trustGroup has fixed entitlement to more than 50% of income or capital

Trustee or majority of trustees accustomed to or under obligation to act in accordance with, or might reasonably be expected to act in accordance with wishes or directions of group

Group can appoint or remove the trustee or majority of trustees

Control of trustee company

Company or majority of directors accustomed to or under obligation to act in accordance with, or might reasonably be expected to act in accordance with wishes or directions of group

Group can cast more than 50% of votes at a general meeting

Group Primary entity

Part 8 Associates

Group

• Parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of individual and spouse

• Spouse of individual or relative

Relatives

Other members

In sole member fund other trustee/director

Tax law partnerships, other partners and their spouses and children

Controlled companies and trusts

Part 8 associates

These are part 8 associates

Brother, his spouse & children & his

children’s spouses

Company wholly owned by member

Family trust that has member’s

spouse as appointor

Company owned 50% by member & 50% by member’s

father

Business partner & spouse & children

Person my wife owns rental

property with

These are NOT part 8 associatesCousins

• Both directors

• No casting vote

• No practical or effective control with one

Company - 50% member and 50% unrelated

• Unless a standard employer sponsor

• Eg my family trust and another family trust are in partnership provided corporate trustees

A partner of an entity controlled by a member

Two unrelated shareholders in private company

Practical controlChairperson casting vote

Behaviour of parties

• R Ali Super Fund v FCT

• Russell v FCT

• Stewart v DFHCSIA

• Gutteridge v FCT

• TR 2005/5

• TR 2012/D5 (withdrawn)

Alternate Structure 2

Ungeared Unit Trust

Ungeared unit trust

Exemption to in-house asset rules

Entire investment in unit trust is exempt

Strict Requirements (Regs 13.22B, 13.22C

& 13.22D)

If breach, exemption ceases to apply

Cannot use exemption again for that entity

Ungeared unit trust

Regs 13.22B, C & D

No loans to, or investments in other entities

Not acquired assets from related party (except business

real property)

No assets leased to related party

(except business real property)

Not carry on a business

arm’s length terms for all transaction

No charges over assets

No borrowings

Alternate Structure 3

Pre-1999 Unit Trust

Pre-1999 unit trust

Units pre 11 August 1999 are not in-house assets

Investments after 11 August 1999 and before 1 July 2009 had transitional rules

Investments after 30 June 2009 are in-house assets unless exemption applies

Transitional rules (sections 71A-E)

Partly paid units ReinvestmentSection 71E

election

Using alternate structures

Unrelated unit trust

Unit

Trust

Trustee

P1 P2

P1

P2

Provided not ‘related trust’, can

purchase new assets

borrow

mortgage its assets

LRBA issues & unrelated unit trustSingle

acquirable asset

multiple assets

developments

improvements

Limited life

One asset only -can’t continue to

use

One SMSF investor only

can’t have 2 SMSFs invest in one LRBA

practically can’t have 2 LRBAs (one

for each SMSF) invest in single

property

Limited recourse loans

onerous requirements

bank policy

Issues with unrelated trusts

Part 8 associate rules complicated & subject to changing circumstances

SMSF cannot acquire more than 50%

Exit of investor

Some banks won’t entertain

Ungeared trust & borrowing

Unit

Trust

SMSF

Bare Trust

Bank

LRBA issues & ungeared unit trustSingle

acquirable asset

multiple assets

developments

improvements

Limited life

One asset only -can’t continue to

use

One SMSF investor only

can’t have 2 SMSFs invest in one LRBA

practically can’t have 2 LRBAs (one

for each SMSF) invest in single

property

Limited recourse loans

onerous requirements

bank policy

Issues with ungeared trustsCan’t use property as security

Investment limitations

Cannot be carrying on business

Most banks won’t entertain

If need more borrowings, must set up second LRBA

SMSF & related party can jointly investment & SMSF can acquire over time

Pre-1999 unit trustCan

purchase new assets

borrow

mortgage its assets

Unit

Trust

Trustee

SMSF

LRBA issues & pre-1999 unit trustSingle

acquirable asset

multiple assets

developments

improvements

Limited life

One asset only -can’t continue to

use

One SMSF investor only

can’t have 2 SMSFs invest in one LRBA

practically can’t have 2 LRBAs (one

for each SMSF) invest in single

property

Limited recourse loans

onerous requirements

bank policy

Issues with pre-1999 unit trusts

Must have already

SMSF cannot invest more today

Generally must distribute all income each year

RecapLRBA are useful but have limitations

Don’t forget the alternatives

In-house asset rules are complicated

Have a good look – you’ll be surprised!

Beware anti-avoidance and other possible breaches

Make sure you consider fixed trust, non-arm’s length income, public trading trust

Recap

Thank youQuestions?

Clinton Jackson

Cooper Grace Ward Lawyers

+61 7 3231 2451

clinton.jackson@cgw.com.au

Disclaimer

© SMSF Association 2016

This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation.

Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.