Transfer of property from family trust to SMSF - can your family trust be the vendor and the lender at the same time?
Can your SMSF buy property from your family trust? Jeff Song considers.
Let’s consider an example, John and Mary are the trustees and appointors of J&M Family Trust which is a discretionary trust with themselves and their family members as beneficiaries. The trust owns a commercial property leased to an unrelated third party business. They also have their own SMSF of which they are the only members and trustees. They wish to sell this property to their SMSF to capture the benefit of a more concessional tax environment. Their SMSF does not have sufficient cash to make the purchase and the trustees are considering borrowing from their discretionary trust to finance the purchase.
In short, this is possible from superannuation compliance perspective but trustees should be extra-cautious with multiple layers of compliance hurdles. This is particularly so in the current environment where the ATO is paying a close attention to SMSFs heavily invested in property with limited recourse borrowing arrangements.
Investment strategy of the fund
The purchase with loan must also comply with the SMSF’s current investment strategy. Yes, SMSF is “self-managed” but John and Mary as SMSF trustees are required by law to “formulate, review regularly and give effect to an investment strategy”. While not a mandatory legal requirement, it would be prudent to obtain financial advice in relation to your investment strategy and proposed transaction.
Authority of the trustees to sell and lend money
Before proceeding, they should also seek advice as to whether their family trust deed and/or applicable trust laws allow them as trustees to enter into the two transactions (i.e. sell the trust property and lend trust money) and comply with any applicable conditions, procedures or restrictions.
Acquisition from related party
The SIS Act prohibits SMSFs from acquiring a property from a related party with limited exceptions which include:
- acquisition of a business real property from a related party; or
- acquisition of an in house asset from a related party
The family trust is apparently related to the SMSF and for John and Mary as SMSF trustees to acquire the property while complying with superannuation laws, they must ensure that the acquisition meets one of the above exceptions. While this property will not meet the in house asset exception (as the property is currently leased to an unrelated party, it would likely meet the business real property exception as an acquisition of property that is “wholly and exclusively used in one or more businesses”.
As this will be a related party transaction, the purchase must be properly documented and undertaken as if it was between unrelated parties (i.e. contract of sale, deposit, exchange and settlement) and the purchase price should match the current market value of the property evidenced by an independent valuation report.
Loan from a related party
Similarly, the related party loan should be formally documented and undertaken on arm’s length terms (i.e. with a formal deed of loan, mortgage and actual advance of loan amount between parties). We recommend trustees to stay in the safe harbour and follow the ATO’s practical compliance guidelines when determining the loan terms.
Also, they should seek advice and ensure that the arrangement complies with the limited recourse borrowing provisions of the SIS Act.
Limited Recourse Borrowing and member’s total superannuation balance
The Senate has recently passed the amendment bill to include a member’s share of the liability under a limited recourse borrowing arrangement in the calculation of their total superannuation balance [‘Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2019’].
The new measures would retrospectively apply to LRBAs entered into on or after 1 July 2018 where:
(a) the lender is an associate of the SMSF; or
(b) the member or members participating in the LRBA have satisfied an unrestricted release condition (i.e. attaining the age of 65 or being ‘retired’ for superannuation purposes).
As John and Mary’s SMSF is borrowing from a related family trust, the amount of the loan as at 30 June 2020 will need to be proportioned among John and Mary’s total superannuation balance and thereby affect their non-concessional contributions cap for 2020/21 financial year. For example, if this causes any of their total superannuation balance to reach $1.6 million, the relevant member will be unable to make non-concessional contributions for the 2020/21 financial year.
The above are some of the issues they should consider but the list is not exhaustive. If you are considering a similar transaction, we recommend that you seek legal advice before proceeding.
For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email email@example.com to see how we can assist.