The Federal Parliament recently passed legislation which affects the tax treatment of limited recourse borrowing arrangements. The Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 (Cth) (‘Act’) received Royal Asset on 16 September 2015.
We consider relevant aspects of the amendments made to the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’) below, including changes to the final legislation from the exposure draft which was released by Treasury on 19 January 2015.
Summary of the changes
The legislation clarifies the tax law treatment of bare/holding trusts whereby a custodian entity holds an asset on bare/holding trust for the SMSF trustee as part of a limited recourse borrowing arrangement under s 67A of the Superannuation Industry (Supervision) Act 1993 (Cth). As a consequence of the legislation, the bare/holding trust is ignored for income tax law purposes and the SMSF trustee as the investor and beneficiary is considered the owner of the asset. The Act implements a general ‘look through’ approach so that that all the income tax consequences associated with the underlying asset held on bare/holding trust flow through to the SMSF trustee investor, including with respect to dividends and franking credits.
The ‘look through’ treatment also addresses certain CGT events which can technically arise in the course of limited recourse borrowing arrangements, such as when the asset is transferred from the bare/holding trustee back to the SMSF trustee (ie, CGT event E2), and when the SMSF trustee becomes absolutely entitled to the asset upon repayment of the final instalment (ie, CGT event E5). Section 235-820(2) of the ITAA 1997 provides:
An act done in relation to an instalment trust asset of an instalment trust by the trustee of the trust is treated as if the act had been done by the investor (instead of by the trustee).
Example: A trustee disposes of the asset. Any capital gain or loss is made by the investor, not by the trustee.
The legislation also recognises the existing industry practice in relation to income tax returns not being prepared and lodged for the bare/holding trust. As the bare/holding trust effectively does not exist for income tax purposes under the ITAA 1997, no separate income tax return is required to be prepared by the bare/holding trust trustee and any income tax consequences in respect of the asset is to be recognised in the SMSF trustee’s income tax return (refer to s 235-820(1) of the ITAA 1997).
GST
In the original draft legislation, the issue of GST was not addressed, leaving some uncertainty about whether a look through approach would apply in respect of GST.
There was some reason to believe that the ATO’s concessionary approach to bare trusts generally in GSTR 2008/3 would also extend to bare/holding trusts as part of limited recourse borrowing arrangements. However, the duties of a bare/holding trustee under a limited recourse borrowing arrangement are arguably more extensive than the ‘minor’ trustee duties associated with bare trusts that the ATO expressly recognised in GSTR 2008/3.
Fortunately, the final legislation resolves these issues. Although the Act does not amend the A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 235-820(5) of the ITAA 1997 provides:
Any consequence arising under the GST Act for the trustee of the instalment trust, as a result of anything done in relation to the instalment trust asset, is treated as if it had arisen for the investor (instead of for the trustee), even if that consequence would not have arisen had the thing been done by or to the investor.
Accordingly, the Act makes clear that the SMSF trustee is treated as the ultimate entity when making supplies and claiming input tax credits for GST purposes.
Stamp duty
The changes have no effect on stamp duty which is determined according to laws in each State and Territory. Naturally, these laws vary across each jurisdiction and expert advice should be obtained to ensure duty efficiency.
Conclusion
Overall, the new legislation creates improved certainty in relation to the income tax treatment of bare/holding trusts utilised as part of limited recourse borrowing arrangements. The changes which broadly ensure that all the income tax consequences of the custodian arrangement flow through to the SMSF trustee are welcome, particularly with the additional clarity that has been provided on the question of GST.
For more information on Limited Recourse Borrowing Arrangements, contact us at Leenane Templeton on 02 4926 2300
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
By William Fettes, Lawyer and Bryce Figot, Director, DBA Lawyers