Key points
- A statement by the ATO last year raises some doubts about the ability of your SMSF to pay out a loan from an insurance policy proceeds.
- Stamp duty for transfer of property into SMSFs in NSW has increased from $50 to $5000.
Limited Recourse Borrowing Arrangements, or LRBAs, might be under review as a result of the Murray Review but for those who already have these gearing arrangements in place, there are some recent developments and information published by the ATO that you need to be aware of.
1. Cross insurance
A common LRBA structure is as follows – an SMSF has an LRBA and more than one member. If one of the members dies, or is permanently disabled, the SMSF trustees would like part or all of the loan to be paid using the proceeds of a life insurance policy so that the asset doesn’t have to be sold.
(Just some background information, when a member dies or is permanently disabled and the super fund has a life insurance in place covering either or both of these events then obviously the trustee will claim on the life policy. Any claim proceeds are then paid into the fund. The issue is always: what does the trustee do with these policy proceeds? Typically they’re paid out of the fund as lump sum amounts or pensions depending on what is allowed by the fund’s trust deed and what best suits the individuals involved. In the above scenario, the trustee wants to keep the insurance proceeds to repay the loan.)
Under rules put in place from 1 July 2014, a super fund can only take out new insurance policies when “the insured event is consistent with a condition of release”.
Two conditions of release under super laws are death and permanent incapacity. So can life insurance policies allowing for these events be taken out by a trustee if the proceeds will be used to repay a super fund loan?
The ATO published information on its website on 17 November 2014, stating that, in its view, the policy proceeds must be paid out of the super fund, i.e. they can’t keep the proceeds within the fund to pay down the loan.
Some superannuation lawyers believe that the ATO’s view seems inconsistent with the wording of the rules.
As the ATO view hasn’t been expressed in a publicly available ruling it can’t be classed as its official legally binding view.
If you’re potentially impacted by this change, what should you do? Firstly, you should consider getting advice from an experienced superannuation lawyer. Secondly, you might want to revisit your arrangements and assess where your financial affairs would be in the event that one of your super fund members were to die or be permanently invalided and the insurance proceeds had to be paid out of the fund.
Note, however, that this ATO view doesn’t apply to any insurance policies purchased by a super fund trustees before 1 July 2014.
2. NSW stamp duty change
NSW offers two generous stamp duty concessions involving LRBAs. The first is the transferring of real estate to an SMSF. From 1 July 2014, the maximum stamp duty amount increased from $50 to $500, which is still a remarkable concession on normal ad valorem stamp duty – for example, NSW stamp duty on real estate of worth $500,000 is normally almost $18,000.
In reality, this concession will only apply to commercial, retail or industrial real estate as this is the only type of property that can be transferred into a super fund when that property is owned by a related party of the fund.
If the above purchase is made via an LRBA, then the stamp duty is also $500 – this rate hasn’t changed – which is also a large concession.
For these concessional rates to apply, the property must be owned by an individual and the purchaser must be an SMSF trustee. The property must be used to provide retirement benefits for the individual, which means your fund will probably have to prepare segregated financial accounts.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.