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"SMSF and Trusts' Transactions for Real Property Matters" seminar
 

"SMSF and Trusts' Transactions for Real Property Matters" seminar

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This is a copy of my “SMSF and other Trusts” seminar that I presented to the Australian Institute of Conveyancers’ members 3 times this year; being at Perth, Bunbury and mostly recently in ...

This is a copy of my “SMSF and other Trusts” seminar that I presented to the Australian Institute of Conveyancers’ members 3 times this year; being at Perth, Bunbury and mostly recently in Geraldton. Appreciably these slides only cover some of the trusts and compliance issues that we discussed in detail during these seminars and that pertain to Conveyancers/ affect settlement transactions. The key are covered are: Self-Managed Superannuation Funds, Limited Recourse Borrowing, Bare and Custodian trusts, Family Trusts’ real property transfers into SMSFs and vestings, Special Disability Trusts plus a myriad of other practical and commercial issues.

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  • Special Disability TrustsEstablished by parents and immediate family members to plan for the future care and accommodation needs of a person with a severe disability.Special Disability TrustsThe benefits of a Special Disability Trust are:that a gifting concession of up to $500,000 combined is available for eligible family members of the principal beneficiary andthat an assets test assessment exemption of up to $596,500 (indexed each year) is available to the principal beneficiaryTo be eligible to be a principal beneficiary, the disabled person must meet the definition of severe disability
  • Special Disability TrustsEstablished by parents and immediate family members to plan for the future care and accommodation needs of a person with a severe disability.Special Disability TrustsThe benefits of a Special Disability Trust are:that a gifting concession of up to $500,000 combined is available for eligible family members of the principal beneficiary andthat an assets test assessment exemption of up to $596,500 (indexed each year) is available to the principal beneficiaryTo be eligible to be a principal beneficiary, the disabled person must meet the definition of severe disability
  • Property meansUnit 44, 33 Bronte Street East Perth Western Australia 6004 to be known as Lot 44 on Strata Plan 60018 and currently being part of Lot 500 on Deposited Plan 56653 being the land comprised in Certficate of Title Volume 2721 Folio 644 and shown for identification purposes only hatched on the plan attached, marked A.See TFH 10981
  • Special Disability TrustsEstablished by parents and immediate family members to plan for the future care and accommodation needs of a person with a severe disability.Special Disability TrustsThe benefits of a Special Disability Trust are:that a gifting concession of up to $500,000 combined is available for eligible family members of the principal beneficiary andthat an assets test assessment exemption of up to $596,500 (indexed each year) is available to the principal beneficiaryTo be eligible to be a principal beneficiary, the disabled person must meet the definition of severe disability
  • What is a Special Disability TrustA Special Disability Trust is a trust that can be established during your lifetime or in your Will for the benefit of a person with a “severe disability” (Principal Beneficiary) to pay for:Their reasonable accomodation and care needs; andOther purposes for their benefit as permitted by the relevant legislation.A Special Disability Trust must meet the legislative requirements for the available concessions to apply.
  • Who is a person with a severe disabililtyA person over 16 who can establish:A level of impairment that meets the criteria for a disability support pension, invalidity service pension or invalidity income support supplement; andA disability that would, if the person had a sole carer, qualify the carer for carer payment or carer allowance, or is living in a state funded accommodation for people with severe disabilities; andThey cannot work for more than seven hours a week in the open labour market due to their disability.A person under 16 who is “profoundly disabled child” under the Social Security Act.
  • What is a reasonable accommodation and care needs.A Special Disability Trust can only pay for :Reasonable cost of accommodation needs of the Principal Beneficiary;The reasonable care needs that arise our of the disability of the Principal Beneficiary;The Principal Beneficiary’s dental and medical expenses, incl. membership costs for private health funds; andA limited level of discretionary spending not directly related to care and accommodation needs of the Principal Beneficiary . This is capped each financial year. The cap is CPI indexed every 1 July. The cap in the 2012/13 Financial year is $10,500.
  • Who can contribute to a Special Disability TrustAnyone can give to a SDT. However, the Principal Beneficiary and their partner can only do so if the gift is funded by:Assets the Principal Beneficiary received under a will; or A superannuation death benefit received by the Principal Beneficiary,And the funds are transferred to the trust within 3 years of their receipt by the Principal Beneficiary.Any contribution to the trust must be an unconditional gift.
  • [3.111.01] Explanatory MemorandumThis clause provides an exemption from duty for a transfer of, or an agreement for the transfer of, dutiable property made to a special disability trust as provided for by section 1209L of the Social Security Act 1991 (Cth) where there is no consideration for the transfer.A special disability trust is one established for a beneficiary that has a disability as a result of which he or she is not working, and has no likelihood of working, for a wage that is at or above the minimum wage, or if the beneficiary is under 16 years of age, has a profound disability. This exemption is a change in policy and is in accord with the recommendation of the State Tax Review.
  • Special Disability TrustsEstablished by parents and immediate family members to plan for the future care and accommodation needs of a person with a severe disability.Special Disability TrustsThe benefits of a Special Disability Trust are:that a gifting concession of up to $500,000 combined is available for eligible family members of the principal beneficiary andthat an assets test assessment exemption of up to $596,500 (indexed each year) is available to the principal beneficiaryTo be eligible to be a principal beneficiary, the disabled person must meet the definition of severe disability
  • Special Disability TrustsEstablished by parents and immediate family members to plan for the future care and accommodation needs of a person with a severe disability.Special Disability TrustsThe benefits of a Special Disability Trust are:that a gifting concession of up to $500,000 combined is available for eligible family members of the principal beneficiary andthat an assets test assessment exemption of up to $596,500 (indexed each year) is available to the principal beneficiaryTo be eligible to be a principal beneficiary, the disabled person must meet the definition of severe disability
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"SMSF and Trusts' Transactions for Real Property Matters" seminar "SMSF and Trusts' Transactions for Real Property Matters" seminar Presentation Transcript

  • “What are the Range and Type of SMSF and Other Trusts’ Real Property Transactions That Can Occur?” AICWA – August 2013 Presented by: Tom Meagher – Director: Commercial Law © Murfett Legal 2013
  • Tom Meagher | Director | Commercial Law Tom has over 20 years‟ business experience; including working for major national and local law firms, owning and managing an IT businesses, and being a director and inhouse counsel for a public company. Tom has excellent communication, technology and personal skills with a proven ability to develop business relationships and maintain clients. Tom‟s clients include a broad range of local and national businesses and organisations (including not-for-profit entities), accounting firms, financial brokers and advisers, franchisors and high net-wealth families. Tom is also a regular presenter of seminars to various client groups and professional bodies on a wide range of commercial law topics. Based on Tom‟s training and business experience, he has a unique understanding of his clients‟ objectives and legal needs. Tom is therefore able to provide a very clientfocused and commercial approach to all your dealings. © Murfett Legal 2012
  • Disclaimer • The information presented in this seminar is intended only as a guide, as to the topic and the matters discussed. • This seminar is not legal advice and must not be relied on as such. • If you have a matter which relates to this seminar or you require legal advice, careful review and analysis of your matter’s particular facts, information and documents is required before proper legal advice can be given or applied to your matter. © Murfett Legal 2013
  • Introduction • At all times a conveyancer must ensure that they, in no way, provide any advice whether legal, financial or taxation, in relation to the „limited recourse borrowing‟ (aka as a geared) transaction. If doubt check with your lawyer or professional indemnity insurer. • This is a new area of law and operates in a highly regulated legal and taxation environment, in addition to the somewhat more complex nature of the Conveyancing matters relating to the limited recourse borrowing arrangement. • It is very important that the trustee(s) of the SMSFs and its related Custodian company directors have sought and obtained proper licensed financial and taxation advice in regards to the proposed Geared Transaction before signing any contract to purchase a property. © Murfett Legal 2013
  • SMSF BORROWING and PROPERTY INVESTMENTS © Murfett Legal 2013 5
  • A SMSF Borrowing Arrangement Explained • The exception in section 67A of the SIS Act generally allows SMSF trustees to borrow under an arrangement where: – the money is applied for the acquisition of a single asset; – the SMSF trustee would not be prohibited from investing in that asset directly – the asset is held on trust by a Custodian so that the SMSF trustee acquires a beneficial interest in the asset, but the asset is segregated for borrowing liability – the SMSF trustee has the right to acquire legal ownership of the asset by making instalment payments to the Custodian – the lender's rights against the SMSF trustee for a default on the borrowing or charges related to the borrowing are limited in recourse to the underlying acquired asset only, as held by the Custodian – the liability of the SMSF trustee(s) to the lender is thus limited to recourse against the asset only. – the Custodian cannot be the exact same entity or persons as the trustee of the SMSF © Murfett Legal 2013
  • Compliance with the Superannuation Industry (Supervision) Act 1993 (SISA) • The “sole-purpose test” - section 62 of the SISA; • The “investment strategy requirement” - section 52(2)(f); • The “related-parties acquisition rule” - section 66; • The “arm‟s-length dealings requirements” - section 109; • The “in-house asset rule” - section 71; and • The “prohibition against charging” - regulation 13.14 of the SISA‟s regulations. © Murfett Legal 2013
  • SMSF Type Property Investments • Non-specialised commercial properties; • Residential properties (being houses, units, villas, townhouses); and • Specialised commercial properties deemed as “SISA compliant” and acceptable to the relevant lender under their then-current SMSF-lending policy guidelines. © Murfett Legal 2013
  • Issues to consider • A single acquirable asset – s67A(1)(a) SIS Act – Off–the-plan purchase with separate titles for apartment and car park SMSFR 2012/1 “We should take a practical approach” • Replacement asset – s67B(2) SIS Act – Maintain /repair / improvement / replacement – Does the improvement change the nature of the asset – Fund can use own money to improve asset, as long as the asset does not become a different asset • Property Development – house on a single title block of land with deposit and final payment • each payment is for the same single acquirable asset and single LRBA is ok – off-the-plan purchase of strata titled unit (purchase of unit yet to be built) • deposit and final balance at settlement may be funded under a single LRBA – single title vacant block of land with construction of house • deposit and final balance at settlement may be funded under a single LRBA – option for off-the-plan purchase of house or strata titled unit • relevant acquirable asset is the option • need new LRBA for the purchase of house and land or the strata titled unit © Murfett Legal 2013
  • Documents & Entities that need to be in existence before the contract can be signed  SMSF trust deed  An appropriate Investment Strategy  A Custodian company must first be established by the SMSF Custodian  Bare Trust Deed  The SMSF will need to acquire a “beneficial interest” in the Property at settlement  The lessor of the Property will become the Custodian upon settlement © Murfett Legal 2013
  • Update Deed for SMSF Include investment strategy options, PDS and corporate trustee for SMSF | Prepare Custodian Trust Deed | Execute contract in name of Custodian Trustee | Obtain loan approval Provide contract and trust deed for SMSF and Custodian Trust | Executed loan documents may require solicitor certification for guarantees | Settlement with funds advanced by bank and title to bank | Find tenants for property and enter into legal lease of property | Make final payment and transfer the asset to the fund © Murfett Legal 2013
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  • TRANSFERRING REAL PROPERTY INTO SUPER © Murfett Legal 2013 15
  • Transfer of Real Property into a SMSF • Things to consider – Is the commercial property currently in the name of the Trustee of a Family Trust? – Who are the members of the SMSF? – Valuation of the Property – Contributions – GST – Lease – CGT © Murfett Legal 2013
  • Scenario 1 Mr A finds a property on the market which he wishes to purchase using his self managed superannuation fund. It is an existing commercial property. He will finance the purchase using a limited recourse borrowing arrangement through the bank • Is this permitted? Yes • Documentation required – • up to date SMSF deed / Investment strategy/ Corp. Trustee for SMSF / Bare Trust Deed / Corp. Trustee for Bare Trust - Super Trustee and Bare Trustee must differ Wording of the Offer and Acceptance: “ABC Pty Ltd as trustee of the XYZ Custodian Trust as trustee of the PQR Superannuation Fund”. There are no other special conditions required. • Duty – normal ad valorem rates • Certificate of Title - registered in the name of trustee of Custodian Trust © Murfett Legal 2013
  • Scenario 2 Mr A finds a property on the market which he wishes to purchase using his self managed superannuation fund. It is an off-the-plan purchase for an apartment. He will finance the purchase using a limited recourse borrowing arrangement through the bank • Is this permitted? Yes – • Documentation required – • the ATO has changed its mind between SMSFR 2011/D1 and SMSFR 2012/1 up to date SMSF deed / Investment strategy/ Corp. Trustee for SMSF/ Bare Trust Deed / Corp. Trustee for Bare Trust - Super Trustee and Bare Trustee must differ Wording of the Offer and Acceptance: “ABC Pty Ltd as trustee of the XYZ Custodian Trust as trustee of the PQR Superannuation Fund”. There are no other special conditions required. • Duty – normal ad valorem rates • Certificate of Title - registered in the name of trustee of Custodian Trust © Murfett Legal 2013
  • Scenario 3 Mr A already owns a property. He wishes to sell it to his self managed superannuation fund. He will fund the purchase by a limited recourse borrowing arrangement. • Is this permitted? yes, so long as business real property and acquired at market value. Section 122 of the Duties Act allows for nominal duty at $20. • Documentation required – – NOTE: SMSF deed must prohibit “pooling” of the asset transferred – • up to date SMSF deed / Investment strategy/ Corp. Trustee for SMSF/ Bare Trust Deed / Corp. Trustee for Bare Trust - Super Trustee and Bare Trustee must differ As related party, we recommend a valuation of the property Wording of the Offer and Acceptance: “ABC Pty Ltd as trustee of the XYZ Custodian Trust as trustee of the PQR Superannuation Fund”. A special condition on the contract would be that the property be immediately transferred to the Custodian Trustee (for compliance with SIS) © Murfett Legal 2013
  • Scenario 3 cont’d • Duty – O& A in the name of the SMSF ( best not the Custodian Trust ,s 122) / nominal duty. – Supply the Bare Trust when lodging – Application form – See also section 126 – transfers of dutiable property between trustees and custodians • Certificate of Title – registered in the name of Bare/Custodian Trustee • Liaise with legal advisor © Murfett Legal 2013
  • Special Disability Trust © Murfett Legal 2013 21
  • What is a Special Disability Trust? Two options • Setting up a trust while you are alive • Setting up a trust through your will, to take effect after you die – (A Special Disability Trust within a Testamentary Trust). The same legal rules will apply © Murfett Legal 2013 22
  • Who is a person with a “severe disability”? Two options • A person over 16 years of age – Level of impairment - “severe disability” – Carer allowance – Cannot work more than 7 hours in open labour market • A person under 16- “profoundly disabled” . © Murfett Legal 2013 23
  • What is “reasonable accommodation and care needs”? • Reasonable costs • Reasonable care • Dental & medical expenses • Discretionary spending of $10,500 © Murfett Legal 2013 24
  • Who can contribute to a Special Disability Trust? • Anyone • Principal Beneficiary and partner only if: – Assets received under a will – Superannuation death benefit Funds transferred within 3 years of receipt • Contribution must be unconditional gift © Murfett Legal 2013 25
  • THE BENEFITS • a capital gains tax (CGT) exemption for an asset transferred into a special disability trust (SDT) for no consideration • a CGT main residence exemption for a trustee of an SDT • a CGT exemption for a recipient of the principal beneficiary's main residence, if their ownership interest ends within two years of the principal beneficiary's death, and • equivalent taxation treatment amongst SDTs established under different Acts. • These advantages are effective for CGT events that happen on or after 1 July 2006 (the year in which SDTs were first able to be established). • Income of the SDT is taxed at the principal beneficiary’s concessional rates, not the trustee rate of 45% © Murfett Legal 2013 26
  • Should You Set Up a Special Disability Trust or Not (cont.) • If the need for money for care and accommodation not that likely, it may not be appropriate to tie up a lot of money in a Special Disability Trust where there will be ongoing accounting expenses. • If you want funds to be available for the person with severe disability more broadly than for just care and accommodation, a special disability trust is not be suitable but may still be partly used. © Murfett Legal 2013 27
  • Section 111 Duties Act (WA) • Duty is not chargeable on a transfer of , or an agreement for the transfer of, dutiable property – – a) to a special disability trust, within the meaning given in the Social Security Act 1991 (Commonwealth) section 1209L; and – b) if there is no consideration for the transfer. • Seek legal advice before transferring property © Murfett Legal 2013 28
  • VESTING A TRUST © Murfett Legal 2013 29
  • VESTING OR TERMINATION OF A DISCRETIONARY TRUST The following information is required in respect of a transfer of, or an agreement for the transfer of, dutiable property to a taker in default on the vesting or termination of a discretionary trust (s.115 of the Duties Act): 5. Copy of the trust deed (or stamped copy if executed prior to 1 July 2008). 6. Copies of any subsequent amendments to the trust deed (or stamped copies if executed prior to 1 July 2008). 7. Duty endorsed copy of the agreement for transfer in respect of the acquisition of the trust asset the subject of the vesting, i.e. contract for sale, offer and acceptance, etc. 8. If the evidence specified in 3 above is not available, then conclusive documentary evidence in the form of the trustee’s minutes, declaration of trust, financial statements, evidence of payment for the property by the trust, etc. will be required. © Murfett Legal 2013
  • VESTING OR TERMINATION OF A DISCRETIONARY TRUST cont’d 5. Complete financial statements of the trust as at the date immediately prior to vesting or termination and as at the previous 30 June. If the former are unavailable also advise of any significant variations between the two dates. 6. The amount of any liabilities assumed under the transaction. 7. The amount of any debts released or extinguished under the transaction. 8. Identify the specific clause/s of the trust deed relating to the distribution of the trust’s property upon a vesting or termination of the trust. 9. Where necessary, confirm how the taker in default is entitled, i.e. family relationship; and 10.Any other relevant information that may assist in the assessment of duty. © Murfett Legal 2013
  • FAMILY COURT SETTLEMENTS © Murfett Legal 2013 32
  • Family Court Settlements Issue: The orders must be followed – Our Instructions: to Vest super fund held property to the 2 former spouses as tenants in common – Family Court orders: • “Upon the sale of Aqua Lot 27.. the funds will be split 50/50”. – Potentially ‘contempt of court’ – New orders required: • “..within 21 days… do all things and sign all documents necessary to vest Aqua lot 27 into their names as tenants in common in equal shares.” © Murfett Legal 2013 33
  • Family Court Settlements contd Issue: Will there be duty payable ? Must have: - Orders of the Family Court of Australia or Family Court of Western Australia - Financial Agreement (BFA) Strict compliance with the orders: - Order that make sense Contemporaneous conditions Discharges required of a party Rates and other adjustments Problems with possession Liaise with the party’s lawyer © Murfett Legal 2013 34
  • How to avoid unnecessary legal risk, cost and stress • Don‟t rely on friends, „mates‟, agents or other non-qualified third parties for “advice”. They: a) do not act for you, b) do not owe you no fiduciary duty; and c) are not qualified (or insured!) to give you proper legal advice. • Engage a lawyer at the right time – e.g. you do the deal but before you accept a contract, be sure to obtain appropriate legal advice. • Business lawyers can add value warranty/insurance claims or litigation! • If a dispute arises, be sure to clarify the issues in writing, keep all material information/documents and seek advice early (also, if applicable, promptly notify your relevant insurer – rights of subrogation). and can be better than © Murfett Legal 2012
  • THANK YOU tom@murfett.com.au www.murfett.com.au © Murfett Legal 2013