SMSFs selling geared equities which the Fund borrowed to buy
If your SMSF can’t hold on any longer and must sell a parcel of shares or units which it borrowed to purchase, there are compliance issues which must be remembered, pandemic or no pandemic.
The pandemic is threatening the health of people as well as the economy. The circumstances might provoke trustees to rush into transactions. However it is important to realise that general compliance requirements for SMSFs are still in place despite the lock down of the cities and ATO’s reliefs in limited circumstances.
As an example, let’s consider the situation of John and Mary who are members and trustees of their SMSF and are thinking of selling a collection of units in a unit trust subject to an existing LRBA to increase the needed liquidity of the fund.
John and Mary’s business has been hit hard by the conditions imposed by the pandemic and they read the government’s recent announcement that depending on the circumstances, individuals who have been adversely affected by the virus can have access to their superannuation early up to $10,000 in the current financial year and another $10,000 in the next.
John and Mary are considering selling $20,000 worth of their 100,000 units in a unit trust their SMSF holds subject to an existing LRBA. All units are identical and worth $1 each.
When liquidating a collection of geared equities/units, trustees should take extra caution. At the time of the purchase, there would have been a requirement under superannuation gearing law that a loan could only be used to acquire ‘a single acquirable asset’. In relation to shares and units, a parcel or group of identical shares or units (i.e. of the same type, value or class) is deemed to be ‘a single acquirable asset’ for LRBA purposes.
Once the units are acquired with the loan they will have to be held as a single undivided parcel until the full repayment of the loan as s67B of the SIS Act operates to effectively prohibit any trading of a portion of the acquired collection of units.
From LRBA compliance perspective, John and Mary’s options regarding the units are:
- sell all of the units; or
- discharge the loan in full and sell any portion of the units; or
- retain units in the fund.
Their decision should also be based on and comply with the current investment strategy of the Fund and if the decision involves further actions by the holding trustee, there should be a clear documented direction from the fund trustee to the holding trustee.
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