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