27/10/2011

If your super fund borrows to buy a property can the custodian company sue? If you borrow funds to acquire property for your SMSF section 67A of the Superannuation Industry (Supervision) Act 1993 (Cth) ("SIS Act") requires that it is held on trust with the SMSF having a beneficial interest in it. 

The usual practise is for a company to act as the 'holding trustee' while the loan is being repaid.  A bare trust is not required by the SIS Act but is well suited to the task of merely holding the property on behalf of the SMSF.  The holding trustee, as a bare trustee, is not permitted to act unless it is at the direction of the SMSF.

In Bruton Holdings Pty Ltd (In Liq) v Commissioner of Taxation [2011] FCAFC 79 the Federal Court considered whether obligations of a bare trustee extended to commencing legal proceedings, and as a result, whether the bare trustee is indemnified for its legal costs.  In this case the proceedings which had been commenced and decided were to have a charge notice issued by the ATO over trust funds declared void.  Those proceedings were successful for Bruton; however the eventual victory was on appeal to the High Court, so there was shortfall between the legal costs the ATO were required to pay and the amount actually incurred.  Could the Custodian pay that shortfall out of the trust fund or did it have to pay it from its own funds?

The ATO's view was that when Bruton instigated the initial proceedings on the charge notice being declared void this was not part of Bruton’s function as a bare trustee; giving Bruton no right of exoneration, indemnity or recoupment for the shortfall in its legal expenses. 

Initially the Court made a declaration in favour of the ATO that the costs were not properly incurred in Bruton’s function as a bare trustee.  However, Bruton was successful in its appeal.

The appeal Court decided that the initial litigation was ‘necessary to protect trust property’.

A bare trustee is a holding entity which must seek permission to act from the beneficiary (SMSF), however there is sufficient case law which indicates that actions undertaken to protect the trust property may be acceptable.

CGU Insurance Limited v One. Tel Limited (in Liq) (2010) 368 ALR also confirmed that a bare trustee has an obligation to protect and maintain trust property even if not created through legislation or within the deed (unless it is negated by the law or trust deed). 

In Bruton’s appeal the Court confirmed that “it has long been accepted that what a bare trustee must do in discharge of its obligations will vary with the nature of the trust property and whatever might threaten it.”

If you have any questions in relation to Limited Recourse Borrowing or the rights of your Custodian/bare trustee, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.