Peter Townsend

Amendments made last month to the NSW Duties Act could cause material headaches to super funds holding real estate in NSW.

The only remedy for those headaches is good compliance documentation.

If you’re interested, the legislation was called the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW).

Under the Act, ‘ad valorem’ duty (i.e. duty based on the full value – like what you pay on your property purchase) will be levied on the making of a statement that has the effect of acknowledging that property vested, or to be vested, in the person making the statement, is held, or is to be held, in trust for a person mentioned in the statement.

Don’t yawn, keep reading if SMSF property held in NSW

I can hear you yawning but you need to stay with me if your SMSF owns property in NSW.

The now-commercialised and hellishly expensive land titles registration service in NSW responsible for administering the land titles register has the same policy as its public predecessor in refusing to register a trust on the land titles register.

If your SMSF owns real estate the title only shows the name of the trustee of the SMSF not the fund itself.  What happens if it becomes necessary to prove to a third party (bank, ATO, family court, creditor etc) that the trustee is in fact holding the property on trust for the fund?

Previously when asked to assist with this issue we’ve suggested an Acknowledgement of Trust – a document which created no new legal or equitable rights but simply acknowledged an existing trust. This now seems to be dutiable in NSW, with the person making the statement liable to pay duty on the dutiable value of the property.

This legislative change follows decisions like Chief Commissioner of State Revenue v Benidorm Pty Ltd [2020] where the Court of Appeal unanimously held that a document which does not effect a transaction, but merely acknowledges an existing legal position, is not liable to duty under the Act.

Potential minefield

It is not yet clear how these provisions will affect various legal documents in practice, however given the various acknowledgements of existing trusts in many legal documents it has the potential to be a minefield.

So how do you now prove that the registered proprietor of the land is holding that land on trust for the SMSF?

Have the necessary compliance documents:

• resolutions of the fund trustee
• resolutions of the fund members
• bank statements showing that all the purchase money came from the fund.

And, of course, keep all the records of the transaction like contracts, correspondence, legal files, duty payments etc.

Oh, by the way, the same applies to your Family Trust.

The post New headaches for NSW property owned by SMSFs appeared first on AdviserVoice.

‘Now is the time to check and double check those contribution caps,’ says Peter Townsend, principal of Townsends Business & Corporate Lawyers.

‘If you or your clients are going to make further contributions before June 30 it’s important to learn from those who have gone before you and fallen foul of the ATO through contribution timing errors with dire implications.

Rule 1: When is a payment actually made?
Verschuer v FCT [2013] AATA 12 was a case where Dymocks had made a payment of $90,000 (as a concessional contribution for a director and partner of the owner) to a clearing account of Colonial First Choice on 27 June 2008.  However payment was only actually applied to the member’s account on 23 July 2008.  This resulted in the contributions being made in the following financial year.

Without knowing of the delay in the contributions being applied to her member account, during the 2008-09 financial year Verschuer made further contributions of around $90,000 (concessional contribution cap was $100,000 at that time), and $450,000 non-concessional contributions invoking the bring forward rule.

When the original $90,000 contribution intended to be made in the 2007-08 financial year was delayed until the 2008-09 financial year, Verschuer had clearly breached the contribution cap limits (reportedly by $89,314.21) and this resulted in excess contributions tax being levied of about $70,000.

Townsend warns: ‘Check not only all contributions made for both this year and the previous year, but also the dates they were actually received by the Fund.  Indeed, know your client’s full contribution history for the last three years just in case.’

Rule 2: Careful with your administrative processes
Davenport v FCT [2012] AATA 760 showed the need for attention to detail.  Here payments were transferred on 27 June 2008.  Although it was not until 1 July 2008 that the funds were credited to Davenport’s account.

The reason for the delay was that Electronic Funds Transfer (EFT) payments were made with no clear details to identify the relevant member or account.  This was referred to in the case as ‘clerical errors’.

Despite these errors being beyond the control of the member who did not process the payment themselves, it resulted in excess contributions tax being levied as the contributions were actually made upon the allocation to Davenport’s account rather than during the previous financial year as intended.

Townsend warns: ‘Know precisely how electronic payments will be treated within the electronic payments system and don’t leave it til the last minute to make those payments.  Ensure that any specific requirements by the receiving Fund are met when making payments using electronic transfers (for example including your client’s membership number as a reference).’
 
Rule 3: Knowing just some of the rules is dangerous
Applicant 1659 of 2012 and FCT [2012] AATA 754 involved a member who had knowledge of the processing of superannuation employer contributions (SG).  Each year the member chose to salary sacrifice her annual bonus.  The company sent a cheque containing both the member’s salary sacrifice and the employer SG contributions.  The cheque was received by her Fund on 3 July 2009.

The member knew that employer SG contributions could be received within 28 days of the end of the month.  Unfortunately the member believed the same principle also applied to personal concessional contributions being accepted up to 28 days following the end of the month.  This resulted in excess contributions tax being levied as the time of the contribution being made was based on the time the cheque was actually received.

Townsend says: ‘Know the precise allowable time for contribution of the various different types of contributions and don’t guess that they are all the same. Although the recent 5 April Changes to Superannuation will introduce a different way of treating excess contributions (if they are ever passed and not repealed by a new government) it is unwise to allow a fund to accept excess contributions.  The consequences are not always apparent and will most likely be very onerous.’

The post Contribution timing errors ‘dire’, says lawyer appeared first on AdviserVoice.

Many have missed the point that renovations can only occur for ungeared property if trustees are seeking favourable tax treatment for the work done.

What has always been allowed for any property is the ability to provide maintenance and repairs which are tax deductible within clear criteria.

“Some SMSF trustees borrowed money to buy an older property and are stuck with a deteriorating asset on which they cannot carry on renovations.

“The ATO has given no indication that the rules on renovating older properties will be changed to allow geared residential properties to be renovated.

“To have the capacity to buy a property freehold and then renovate to add significant value is more in the realm of wealthier SMSFs, where cash is available to make a large capital purchase such as a property.

“SMSF trustees wanting to add wealth with renovation strategies need to ensure that sufficient cash is available and that contributions (if needed) can be made to finish the renovations,” said Peter Townsend, Managing Director, Townsends Business & Corporate Lawyers.

“The sole purpose test has to be observed in any transaction inside superannuation. The usually long-term nature of renovation process has to be shown to fit that test. The sole purpose test demands that superannuation is used to benefit the member in retirement, not when the property market comes good,” said Mr Townsend.

The post Renovating property inside an SMSF appeared first on AdviserVoice.

These difficulties can include:

• Getting the loan settled correctly and on time
• Transferring the property to the SMSF tax free when loan paid out or selling property tax free when in retirement.

The steps are as follows:

1. Determine (often with the help of the fund’s accountant or financial planner) that borrowing would be an appropriate strategy to leverage investment
2. Check the SMSF trust deed to ensure trustee has power to borrow, grant security and allow assets to be held by custodians/nominees for the trustee (if not, amend the trust deed)
3. Check the SMSF investment strategy to ensure it allows for the acquisition of the investment asset and permits borrowing for that purpose (if not, amend the investment strategy)
4. Source the asset for purchase, negotiate the price and reach agreement with the vendor
5. Finalise borrowing arrangements with the lender including in-principle loan approval
6. Determine who is to be the custodian – if a new company, purchase the new company
7. Custodian resolves in writing to act as custodian for the super fund trustee in the purchase of the asset
8. SMSF trustee resolves in writing to purchase the asset and to appoint the custodian to act for the super fund trustee as bare trustee of the bare trust
9. Sign the bare trust deed (Qld, SA, NT)
10. Signing of the purchase contract by the custodian (note: not SMSF trustee)
11. SMSF trustee provides all the deposit money for the purchase (should come directly from the super fund’s account) – if the deposit initially comes from the pocket of the SMSF trustee, then this deposit amount should be paid into the SMSF as a superannuation contribution within several weeks and notation made to that effect in the SMSF’s records
12. Custodian and SMSF trustee sign the bare trust deed (NSW, ACT, VIC, TAS, WA)
13. SMSF trustee signs all loan documents with the lender (note: SMSF trustee is the borrower)
14. Purchase of the asset is completed using only money coming from the SMSF’s account or from the loan by the lender
15. The bare trust deed is submitted to the NSW Office of State Revenue for payment of stamp duty of $50 (plus $10 for each copy)
16. When the loan is eventually repaid the asset can be transferred from the custodian to the super fund trustee for nominal stamp duty provided the bare trust deed has been stamped already.

3 August 2012

The post 16 steps for SMSF borrowing appeared first on AdviserVoice.

Senior finance industry solicitor Peter Townsend welcomed the full report of the PJC on its Trio inquiry. However, he does not believe that regulators or Government fully understand the potential for another fraudulent MIS offering in the future. 

“There has been no real change to rules making early detection and pre-emptive enforcement easier against flawed schemes or fraudulent management. Awareness and action after the fact are swifter than earlier times but I can’t see evidence that early enforcement is materially tighter or more effective. 

“Ripoll’s reviews of Storm and advice processes etc has built better investor protection around making class actions easier to mount AFTER the event has happened. This is laudable but truly having legislation that would stop it happening again by malicious advisers is not yet a reality. 

“It is worth remembering that Storm clients had full documentation outlining all the risks associated with growth assets/gearing but this did not protect them. Advisers were involved in recommending Storm services but there was no protection for their clients from regulators. 

“Please don’t think that ‘Fee for Service’ will automatically end the rorts offered by some commission-based schemes of the past. Unreasonably large fees for the service provided are still possible,” said Peter Townsend, Principal, Townsends Business & Corporate Lawyers.

The post Can Trio or Storm or Westpoint-type disasters happen again? appeared first on AdviserVoice.