Limited recourse borrowing arrangements can be used by regulated superannuation funds to purchase property. That purchase may result in one or more dutiable transactions under the Duties Act 2000 (the Act).
Limited recourse borrowing arrangements
The Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) contains a general prohibition against a trustee of a regulated superannuation fund (RSF) borrowing money or maintaining a borrowing of money except in limited circumstances.
These circumstances are outlined in ss. 67A and 67B of the SIS Act. They set out the conditions under which the trustee of an RSF may undertake and maintain a limited-recourse loan and apply to arrangements entered into on or after 7 July 2010 or to an arrangement that is a refinancing of borrowing of money under an arrangement entered into before, on or after 7 July 2010.
They replaced s67(4A), which came into operation on 24 September 2007, and allowed superannuation funds to enter into borrowing arrangements in certain circumstances for the first time.
Briefly, the conditions under which the trustee of a RSF may undertake and maintain a limited-recourse loan are:
- The loan is applied for the acquisition of a single acquirable asset including expenses incurred in connection with the borrowing or acquisition.
- The acquirable asset is held on trust for the RSF trustee.
- The RSF trustee has a right to acquire legal ownership for the acquirable asset by making one or more repayments after acquisition.
- The lender’s rights are only secured against the relevant acquirable asset.
Typically, limited recourse borrowing arrangements have these characteristics:
- The RSF provides all the deposit monies and the balance of the purchase price for the land (the property) from a combination of RSF assets and borrowings from a financial institution (the lender).
- The RSF trustee is the only borrower under the finance agreement.
- A person other than the RSF trustee (the custodian) acquires the property using the money provided by the RSF trustee, pays duty on the acquisition and is registered as the legal freehold owner on title.
- The custodian executes a declaration/acknowledgement of trust that the custodian holds the property on a fixed trust or bare trust for the RSF.
- The custodian grants the Lender a limited recourse mortgage on the terms required by the lender over the property.
- The custodian retains legal title to the property until the borrowing from and mortgage to the lender is fully discharged by the RSF and then the unencumbered title is transferred absolutely to the trustee of the RSF.
Such arrangements are generally structured using custodian trusts, holding trusts, bare trusts or fixed trusts.
While all matters submitted to us for assessment are assessed on their specific facts, it is anticipated that any deed or document used to effect the type of arrangement described above will be assessed for duty on the following basis:
- The initial purchase of the property by the custodian on behalf of the RSF is a dutiable transaction pursuant to s7(1)(a) of the Act. Accordingly, it will attract duty at ad valorem rates at the time the property is transferred to the custodian.
- Subsequently, the custodian will declare that it is holding the property on trust for the RSF trustee. In this instance, s7(1)(b)(i) of the Act charges duty on a declaration of trust relating to the dutiable property, the specification of which forms part of the declaration of trust or part of the transaction constituted by the declaration of trust. Accordingly, in the absence of an exemption, s7(1)(b)(i) of the Act would apply separately to charge duty on the declaration of trust made by the custodian.
- Section 7(1)(b)(i) will not apply if it can be shown that the custodian is merely holding the property for the RSF under a fixed or bare trust. In that case, s34(1)(a)(i) of the Act will apply to exempt the declaration of trust from duty.
- In order for s34(1)(a)(i) of the Act to apply, it must be shown that all monies for the purchase of a particular property have been provided by the 'real purchaser', as this provides confirmation of the resulting trust relationship between the parties. Here, the specific wording of the trust deed may be relevant in making a final determination.
- Alternatively, if the transfer of the property to the custodian and the declaration of trust occurred contemporaneously, s17 of the Act may apply to exempt the declaration of trust from duty.
- The final step of the arrangement is the ultimate transfer of the property from the custodian to the RSF, which is likely to occur upon discharge of the borrowings. Depending on the particular facts of the arrangement, there are two possible exemptions which may apply.
- If the Commissioner of State Revenue has applied s34(1)(a)(i) of the Act to exempt the declaration of trust from duty, then s34(1)(b) of the Act would apply to the subsequent transfer of the property to the RSF.
- Alternatively, s36 of the Act may apply to exempt a subsequent transfer of the property from the custodian to the trustee of the RSF if evidence is produced which establishes that:
- duty was paid when the property was acquired by the custodian, and
- for the whole period from the time the trust was declared by the custodian to the time when the property was transferred to the trustee of the RSF:
- the trustee of the RSF was always the only beneficiary, or
- the beneficiaries (who are natural persons) of the RSF were always the only beneficiaries of the RSF.
The Evidentiary Requirements Manual sets out the supporting evidentiary requirements for the assessment of duty.