28/02/2018

Last year in September we wrote about changes to section 18 of the NSW Duties Act which appeared to provide more flexibility to SMSFs borrowing to buy investment property and entering into Limited Recourse Borrowing Arrangements.

The new arrangements seemed to allow a Fund Trustee to sign the contract of sale and then later incorporate a Holding Trustee so that, at settlement, title could be transferred to the Holding Trustee.  Having a Holding Trustee in place before signing the contract was cumbersome and expensive for SMSFs especially where the property might be sold at auction and the SMSF could not even be sure it would be the successful buyer and therefore need the Holding Trustee.

Section 18(3)(d)(iii) of the NSW Duties Act states as follows:

“(3) The duty chargeable in respect of a transfer of dutiable property that is not made in conformity with an agreement for the sale or transfer of the dutiable property is $10 if:

       (d) at the time the agreement was entered into, and at the completion or settlement of the agreement:

       (iii) if the purchaser purchased as a trustee of a self managed superannuation fund--the transferee under the transfer was the custodian of that trustee.”
 
We have recently been made aware that the Duties Office appears to take a narrow and restrictive interpretation of the above section 18(3)(d)(iii) and requires the custodian company (ie Holding Trustee) to be in existence (ie, incorporated with ASIC) prior to the Fund Trustee signing the contract of sale.

We take a different view.  In our view, limited recourse borrowing arrangements are resulting trusts whereby the custodian holds title to a property where the money was paid by the SMSF (or lender).  Such a trust comes into existence at the time title is transferred to the custodian and not earlier.  A custodian is not acting as a custodian on behalf of someone until title of the asset is transferred to it.  It therefore matters not that the custodian may not have been in existence at the time the SMSF signed the purchase contract.

We believe our view to be consistent with a wider interpretation of the legislation and more in keeping with the purpose of the change.

Whilst the legislation could have been drafted and expressed more clearly, a narrow interpretation of the section seems to provide limited practical application of the section in property transactions.

There may be additional developments in relation to the interpretation of this section in the future however, for now trustees may wish to take a conservative approach, set up a custodian company before signing the contract and have the Holding Trustee sign as a purchaser without relying on s18(3)(d)(iii).  In the event that a SMSF wishes to rely on s18(3)(d)(iii), they should ensure the custodian company is incorporated with ASIC before a contract of sale is signed.

 For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.