Borrowing Using Self Managed Superannuation Funds

Transcription

1 Second Edition THE ACCOUNTANTS ESSENTIAL GUIDE Borrowing Using Self Managed Superannuation Funds Highlighting The Latest Legal, Tax and Wealth Creation Benefits

2 Equiti and the Equiti Logo are protected by a registered trademark Published by: Equiti Financial Services Pty Ltd ABN: AFSL: Level 29, 2 Chifley Square SYDNEY NSW 2000 Ph: Fax: Copyright 2009 Equiti Financial Services Pty Ltd. All rights reserved. Reproduction without permission, in whole or part, is prohibited. 2

3 CONTENTS 1. IMPORTANT INFORMATION 5 2. OVERVIEW 7 3. THE LEGISLATIVE AMENDMENTS LEGISLATIVE REQUIREMENTS TAXATION AND DUTY CONSEQUENCES AN INNOVATIVE AND INTELLIGENT STRUCTURE SUPER STRATEGIES ESTABLISHING THE EQUITI WARRANTS STRUCTURE 67 i. Determine Whether This Strategy Is Right For Your Clients ii. iii. iv. Quantify Your Clients Maximum Borrowing Capacity Establish Your Clients Self Managed Superannuation Fund Establish Your Clients Trustee Company v. Select A Suitable Investment Property vi. vii. viii. ix. Establish the Equiti Warrants Structure Submit Your clients Application For Finance Appoint a Property Manager Property Settlement x. Ongoing Compliance, Administration and Instalment Payments 9. FEES, CHARGES AND COMMISSIONS RISKS APPLICATION PROCESS 104 3

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5 1. IMPORTANT INFORMATION The information contained within this essential guide is general information only and does not constitute personal investment advice as it does not take into account a person s personal objectives, needs or financial situation. It is important that a person considering an investment decision does so in light of their own personal objectives, needs and financial situation and if unable to make such an assessment, it is advisable that the person seek the help of a qualified and authorised financial advisor. If you do not have an advisor you may contact Equiti Financial Services on or the Financial Planning Association on The Equiti Group of Companies, its directors, employees, agents or its advisors do not accept any responsibility for persons acting independently on the information provided in this document and does not provide any advice in relation to superannuation or the appropriateness of establishing a self managed superannuation fund. Individuals who choose to establish this structure should have regard to their superannuation funds governing documents and investment objective and should consult the services of a professional advisor or their accountant prior to making an application to Equiti Financial Services Pty Ltd. Furthermore, the Equiti Group of Companies, its directors, employees, agents or its advisors do not make any recommendation in relation to the suitability of any property as an investment and individuals should make their own enquiries into any property that is to be acquired. The intellectual property contained within this document is protected by Copyright and Equiti Financial Services Pty Ltd will vigorously defend any infringement of those rights to the fullest extent of the law. Equiti Financial Services Pty Ltd, Equiti Property Pty Ltd and Equiti Finance Pty Ltd are direct subsidiaries of Equiti Group Pty Ltd. 5

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7 2. OVERVIEW As a general rule, superannuation funds are restricted from borrowing to acquire direct property assets. Recent amendments to section 67 (4A) of The Superannuation Industry (Supervision) Act 1993 now provides those that have a SMSF with an exception to this general rule. From September 24, 2007, the general prohibition on superannuation funds from borrowing under s67 of The Superannuation Industry (Supervision) Act 1993 ( SIS ), subject to some limited exceptions, has been relaxed to allow superannuation funds to borrow to purchase any asset that they would normally be able to acquire if they had sufficient funds to do so, subject to certain strict instalment warrant like conditions. Broadly, the legislative framework allows the implementation of the following tailored structure: a special purpose trust (hereinafter referred to as the Equiti Warrant Trust or the EWT) is established for the benefit of the superannuation fund; the superannuation fund trustee borrows to fund the purchase of the asset to be held on trust for the benefit of the superannuation fund; the borrowed funds are used by the Equiti Warrant Trust to purchase the asset in which the superannuation fund trustee acquires a beneficial interest; thereafter, the superannuation fund makes payments (referred to as instalments ) to the Equiti Warrant Trust under an arrangement pursuant to which, the superannuation fund has the right to acquire legal title to the asset after making one or more such instalments; a limited recourse loan agreement limits the rights of the lender as against the superannuation fund trustee to the rights relating to the underlying asset or the rights of the superannuation fund trustee relating to that asset. 7

8 Whilst there are many important considerations and certain restrictions that will be highlighted throughout this essential guide for accountants, these legislative changes essentially means that: a SMSF can now borrow money to invest in tax effective property! This is an effective way for an individual that has a positive long-term view of the property market coupled with a desire to leverage their current superannuation assets to potentially build their own direct superannuation property portfolio. The many tax incentives introduced by the Government into superannuation mean that many Australians may now potentially accumulate wealth faster in a superannuation environment than they could by investing in identical assets outside of their superannuation. Although there have always been many benefits of investing in a superannuation environment, it has only been in very recent times that Australians have begun to show an increased interest in managing their personal superannuation assets. So why has this efficient investment vehicle been largely ignored by most Australians? One possible reason is that many feel that they have limited choice when it comes to their superannuation money and, as such, have been restricted to certain investments. Many people may feel more confident investing in real estate but, until now, unless their superannuation fund could afford the full purchase price of a property, superannuation funds were restricted from borrowing money to make this type of investment. With the introduction of this legislative change, superannuation funds can now invest in direct property without the need to have accumulated the full purchase price. In seeking to utilise this structure, it is imperative that fund trustees recognise their obligations in relation to the general investment restrictions and the obligations of the trustee in relation to the fund and its membership. Many of these obligations are highlighted throughout this essential guide. 8

9 HOW DO INSTALMENT WARRANTS WORK? Following is a general overview of an efficient instalment warrant arrangement for self managed superannuation funds that will be further detailed throughout this Guide: THE FIRST INSTALMENT The super fund pays a portion of the value of the asset being acquired (referred to as the Underlying Asset ). This payment is called the First Instalment and is the amount of cash contributed by the superannuation fund to the EWT. The First Instalment will likely cover any deposit and costs of acquisition such as stamp duty and legal fees and essentially any shortfall between the borrowed funds and the monies required to complete the purchase. BORROWINGS The super fund will borrow from a third party lender sufficient funds to complete the transaction possibly using the asset which is being acquired as security for the borrowings. This essentially means the Trustee of the EWT may need to be a party to the loan arrangement and provide security over the asset being acquired. (If Member has to borrow) The member will borrow from a third party lender (using other assets ) sufficient funds to complete the transaction and on lend (on an arms length basis) to the superfund which may or may not be required to procure the EWT Trustee to be a party to the loan arrangement with the member and to provide to the member security over the asset being acquired. Whilst such a lending arrangement certainly satisfies the borrowing requirements of the SIS, it is not the ideal structure for many people as it would require that the other assets be used as security. A much more efficient method is to have the Trustee of the EWT become the borrowing entity. 9

10 (If EWT Trustee has to borrow) The EWT trustee will borrow an amount from a third party lender using the underlying asset as security (the EWT Borrowings). The EWT will on lend these funds to the super fund in order to provide the super fund with sufficient funds to complete the transaction. The role and activities of the EWT Trustee will affect whether stamp duty and other tax concessions will be available. Note any subsequent refinance of the super fund borrowing may not fall within the provisions of Section 67(4A) of SIS. Whilst the legislation may be rectified to address this shortcoming a cautious approach should be adopted. THE EQUITI WARRANT TRUST (EWT) The EWT Trustee acquires the Underlying Asset using the funds provided by the super fund (including the borrowed monies) and is the legal owner of the Underlying Asset. The super fund retains a beneficial interest in the Underlying Asset. ADDITIONAL INSTALMENTS The super fund must make the regular interest and, if applicable, principal repayments in respect of the borrowings and pay the cost and expenses of holding, maintaining and renovating the Underlying Asset. THE FINAL INSTALMENT The Final Instalment is the amount required to discharge any mortgage over the Underlying Asset and any amounts owing to the EWT Trustee. 10

11 WHAT DOES AN INSTALMENT WARRANT ENTITLE THE SUPER FUND TO? The superannuation fund will have: the right to receive all available income earned from the Underlying Asset. the exposure to any capital gains (or losses) from the relevant Underlying Asset. tax benefits associated with the payment of interest during the term of the EWT. The Equiti Warrant Trust structure has been developed under a collaborative effort of many legal, superannuation, property, financing and taxation experts to enable a SMSF to take advantage of the new provisions of the SIS whilst, at the same time, limiting the exposure of the superannuation investments. 11

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13 3. THE LEGISLATIVE AMENDMENTS Following industry consultation, the Government announced on 22 May 2007 that it would: legislate to allow superannuation funds to invest in instalment warrants of a limited recourse nature over any asset a fund would be permitted to invest in directly. Previously, an instalment warrant had been understood to refer to a derivative product that specifically related to listed securities. What created the greatest interest, however, was the prospect that an instalment warrant arrangement could now, in some way, relate to real estate assets. Instalment warrant arrangements in Australia have developed since the early 1990 s (so the government could more easily sell off the Commonwealth Bank to the public) and have typically been created in respect of listed securities, managed investment funds and, more recently, direct property investment. Most notably perhaps was the instalment warrant arrangement that was offered for the privatisation of Telstra (T1, T2 & T3). Essentially, the investor pays par of the asset price in advance and borrows the balance. By understanding, an instalment warrant generally gives the holder the right to purchase the underlying asset (e.g. a listed share) from the issuer (e.g. a bank or financial institution) at a particular price on or before a certain date. The Government s press releases describe the purpose of the amendments as being to allow super funds to invest in instalment warrants and the instrument adopted to achieve this was to insert a specific exemption into s67 of the SIS to specifically deal with instalment warrant style borrowing arrangements. As such, section 67 of the SIS still states that a superannuation fund is not permitted to borrow money whilst the newly drafted section 67(4A) simply providing an exception (or relaxation) to that general rule. 13

14 The wording of the relevant provision (section 67(4A) of the SIS) is as follows: Exception- instalment warrants (4A) Subsection (1) does not prohibit a trustee (the RSF trustee) of a regulated superannuation fund from borrowing money, or maintaining a borrowing of money, under an arrangement under which: (a) the money is or has been applied for the acquisition of an asset (the original asset ) other than one the RSF trustee is prohibited by this Act or any other law from acquiring; and (b) the original asset, or another asset (the replacement ) that: (i) is an asset replacing the original asset or any other asset that met the conditions in this subparagraph and subparagraph (ii); and (ii) is not an asset the RSF trustee is prohibited by this Act or any other law from acquiring; is held on trust so that the RSF trustee acquires a beneficial interest in the original asset or the replacement; and (c) the RSF trustee has a right to acquire legal ownership of the original asset or the replacement by making one or more payments after acquiring the beneficial interest; and (d) the rights of the lender against the RSF trustee for default on the borrowing, or on the sum of the borrowing and charges related to the borrowing, are limited to rights relating to the original asset or the replacement; and (e) if, under the arrangement, the RSF trustee has a right relating to the original asset or the replacement (other than a right described in paragraph (c)--the rights of the lender against the RSF trustee for the RSF trustee's exercise of the RSF trustee's right are limited to rights relating to the original asset or replacement. 14

15 Those assigned the task of wording s67(4a) would, no doubt, raised the question of what is an instalment warrant?, as there is no definition of what constitutes an instalment warrant in any Commonwealth legislation. An instalment warrant has typically been understood to be a type of derivative, being a financial instrument, whereby: the warrant holder acquires beneficial ownership of a share via the payment of two or more instalments; pending payment of the final instalment, the share is held on trust for the warrant holder, who benefits from any dividends paid on the share and capital growth associated with the share; the deferred instalments are, in essence, a loan by the warrant issuer to the holder; if the warrant holder defaults on the loan, the issuer s recourse is limited only to the underlying asset, being the share; and upon payment of the final instalment the warrant holder is entitled to receive the transfer of the share. The new section 67(4A) of the SIS is called Exception Instalment Warrants thus giving the impression that this new exception to the borrowing restrictions is somehow limited to a financial product that many are familiar with, being Instalment Warrants as outlined above. This, however, is not correct. Interestingly, s67(4a) does not use the term instalment warrant other than in the heading to the subsection and there is no limit of the borrowing principles to an investment format that looks or feels like an instalment warrant. More importantly, what is required to satisfy s67(4a), is a set of legal relationships that creates the special purpose structure that subsequently enables a superannuation fund to acquire a beneficial interest in an asset. 15

16 The reason why instalment warrants are considered to be an acceptable super fund investment is because of the limited risk they pose to a super fund. In particular, the limited recourse nature of the loan means that if a super fund defaults on the loan, the other assets of the fund will not be at risk. As such, the superannuation fund is not affected by the type of underlying asset involved (i.e. shares vs real estate). In the past, SMSF trustees have invested in instalment warrants (i.e. Telstra) on the basis that they did not constitute a borrowing or charge at law. However, in November 2006, it was declared by the Australian Taxation Office (ATO) and Australian Prudential Regulation Authority (APRA) that the use of such products by super funds did constitute borrowing. In order to avoid disruption to financial markets, and in response to industry pressure, the Government announced on 3 November 2006 that it would: act to allow superannuation funds to continue to invest in instalment warrants, consistent with longstanding administrative practice These amendments have wider implications in that they not only confirmed the current status allowing super funds to invest in commercial instalment warrants, but they also allow trustees to put in place their own private instalment warrants in order to borrow to purchase any asset, provided certain requirements have been satisfied. This represents a major concession for superannuation funds where the trustee can now borrow to directly acquire assets such as real property and, if properly structured, such an arrangement can be established without creating a definitive financial product. 16

17 A SUFFICIENTLY BROAD DEFINITION... The requirements of s67(4a) are drafted in a manner that permit the existing instalment warrant arrangements in respect of listed securities previously issued by the institutional and investment banks to fall within them. However, a sufficiently broad definition of s67(4a) permits many borrowing arrangements that would not typically be described as an instalment warrant arrangement to comply. In particular, s67(4a) has provided no regard to the following: the definition or identity of who constitutes a lender as such, the lender could be a financial institution, or a member or any other related party of the fund; the identity of the Custodian this could be a person controlled by the lender, or a member or any other related party of the fund or even the lender itself; the amount and frequency of payment(s) that the superannuation fund trustee must make to exercise its right to acquire the asset; whether the superannuation fund trustee may have an obligation, not just a right, to acquire legal title to the asset from the Custodian; the term of the loan; the interest rate; whether the loan is principal and interest or interest-only; whether the loan is secured; whether the loan is personally guaranteed by a third party or by a member of the fund; and whether the lender has any third party security, such as a mortgage over real estate owned by a member of the fund or other related party. 17

18 The above features of a particular borrowing arrangement will still be relevant in the overall analysis of whether the arrangement is permissible under the SIS. In particular, consideration must always be given to other provisions of the SIS including: the sole purpose test (s62); investment strategy requirement (s62(2)(f)); the related party acquisition rule (s66); the in-house asset rule (s71); and the arm s length dealing requirement (s109). Currently, legislation limits the amount which a member can invest in superannuation annually. By borrowing, the superannuation fund is in a position to increase the value of the assets it holds. All future growth will be within a superannuation environment where the taxes will be at a maximum of 15% and can potentially be zero. Provided the terms are compliant not only with the provisions of section 67(4A) but also with the other SIS investment principles, the lender to the superannuation fund may include the member/s themselves. Thus, a person may be able to loan into their superannuation fund what they are not normally able to contribute! While the legislation is not flawed as such, there may be actions investors take which were not intended by the new rules. The ATO and APRA are expected to release policy statements regarding their interpretations of the legislation. In the meantime, advisers and trustees must ensure any actions taken do not contravene the sole purpose test or the recently introduced superannuation contribution caps. What the regulators will not want to see are situations in which trustees use instalment warrants to bypass the intention behind the legislated purpose of superannuation. 18

19 There are areas that have not been addressed in the legislation, for which we await further clarification including: Where a non-arm s length trust is allowed, there must be policies in place to ensure trustees abide by the new legislation, and the opportunities it presents. There must also be processes in place to ensure the assets are appropriately priced, and that the instalment arrangement or structure is an appropriate vehicle for the investment. Policies may be needed to ensure that the interest rate applied is appropriate to the amount that has been borrowed, and that the sole purpose test has been adhered to. It will take time to work through all the implications of the legislation and what it means for clients. Further information will follow regarding the various products and structures available, the legal requirements, and the suitability for clients. 19

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21 4. LEGISLATIVE REQUIREMENTS The Superannuation Industry (Supervision) Act 1993 and Regulations (SIS) place certain restrictions on the activities of superannuation fund trustees, most relevantly for the purposes of this Guide, in relation to the investment function. In addition, the trust deed and/or rules adopted by the fund, will operate to regulate the activities and behaviour of the fund trustee. It is relevant to review these investment restrictions in the context of the proposed arrangements. AUTHORISED INVESTMENTS Authorised investments can be properly described as investments a fund trustee is legally allowed to make. The power of the fund trustee to make particular investments comes from the various state Trustee Acts which generally allow any form of investment unless specifically excluded by the trust deed or rules governing the operation of the fund. Generally, Trustee Act powers are expanded by the trust deed which may contain either an exclusive or non exclusive list of allowed investments or specified exclusions or allow complete trustee discretion. It is important to recognise that the fund trustee s apparently vast discretion is constrained, at least in part by several common law doctrines which are largely reflected by general SIS obligations, the most relevant of which include the sole purpose test, the prudent person requirement and the requirement to act in the best interests of all fund beneficiaries. SOLE PURPOSE TEST The sole purpose test established by section 62 of SIS applies to all regulated superannuation funds in Australia. 21

22 The investment, lending and borrowing restrictions also contained in Part 7 of SIS are all based on the premise of that test. The test supports the retirement income objective and provides that a regulated superannuation fund must be maintained solely for one of the core purposes expressed in SIS which include the provision of benefits on retirement, on attaining a prescribed age or on the death of a member or for at least one of those core purpose and one or more of the expressed ancillary purposes including the provision of benefits on termination of employment or the death of a member. The sole purpose test makes it clear that investment decisions must be made for the ultimate purpose of providing retirement benefits to members or their dependants in the event of a member s death rather than for the purpose of providing any immediate or present income or benefit for the members. TRUSTEE COVENANTS Section 52 of SIS contains covenants on the fund trustee and it is relevant to consider each of the following in turn: The Prudent Person Requirement obliges the fund trustee to exercise the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another. In the context of the proposed arrangements, there must be appropriate and diligent investigation by the fund trustee into the underlying asset proposed to be acquired by the special purpose trust. While the fund will not initially hold legal title to the underlying asset, it must be acknowledged that the ultimate intention of the funding arrangement is to enable the fund to acquire assets which it otherwise may not have had the resources to acquire. Further, it is recognised that the returns to the fund will be derived solely from the value and performance of the underlying investment. The Requirement to Act in the Best Interests of the Beneficiaries imposes on the fund trustee a duty to act in the best interests of all the fund members and with the highest standards of integrity. 22

23 In the context of the proposed arrangements, and particularly where a fund member will be the lender of the funds, the fund trustee must ensure its motives are proper in the context of the interests of all fund beneficiaries. Most importantly, the fund trustee s decision should be driven by the benefits which the proposed arrangements might deliver to the fund as a whole and not by the interest of a particular member or members to secure a desired personal outcome. The Requirement to Formulate an Investment Strategy obliges the fund trustee to formulate and implement an investment strategy that has regard to the whole circumstances of the fund including: the risk involved in making, holding and realising an investment and the likely return from the investment having regard to the objectives and the expected cash flow requirements of the fund; diversification of investments and the extent to which the fund could be exposed to risk from inadequate diversification; liquidity of the investments having regard to the expected cash flow requirements of the fund; the ability to discharge the existing and prospective liabilities of the fund. The fund s investment strategy should be reviewed to ensure that it facilitates the proposed arrangement, however, the basic proposition is that the investment strategy should be formulated having regard to the circumstances of the particular fund. Fund trustees who amend a fund s investment strategy solely to facilitate the proposed arrangements without having proper regard to the required diversification, risk and liquidity considerations risk a potential claim for a breach of one or more of the section 52 covenants. SPECIFIC INVESTMENT PROHIBITIONS In addition to the borrowing prohibition contained at section 67(1) of SIS, certain other specific investment restrictions have potential application: 23

24 1. the lending and financial assistance prohibition prohibits trustees or investment managers of regulated superannuation funds from lending to members or relatives of members or giving financial assistance to members or relatives of members using the resources of the fund. The distinction between loan and financial assistance can be assumed to be intended to cover any form of assistance that improves the financial position of the relevant individual. Accordingly, fund trustees should be vigilant, particularly where it is proposed that a fund member be the lender, to ensure that underlying motive for entering the proposed funding arrangements is appropriate and that the integrity of the arrangement is not compromised by a potential advantage being obtained (albeit indirectly) by any individual. 2. SIS Regulation prohibits superannuation fund trustees from charging fund assets. Section 67(4A) however necessarily implies the requirement for a charge over the underlying asset of the SAIT. Accordingly, SIS Regulation has application to excuse the potential breach of Regulation the prohibition on the acquisition of assets from a related party prohibits the acquisition by a fund trustee of an asset from a related party of the fund (other than in the case of the acquisition of listed securities acquired at market value or the acquisition of business real property from related parties of SMSFs). The prohibition also extends to schemes which would likely result in the acquisition of an asset from a person who has a connection, either directly or indirectly through one or more interposed companies, partnerships or trusts, with a related party of the fund. Importantly, the proposed arrangements are not a mechanism by which property can be transferred from a member or relative of a member to the fund and the fund trustee must be vigilant in identifying the proposed underlying asset of the special purpose trust ensuring the due diligence investigation incorporates a thorough investigation into the provenance and ownership of the asset. 24

25 4. the arms length requirement contained at section 109 of SIS requires that all investment transactions of superannuation entities to be made and maintained on a commercial basis. An important distinction to remember is that while the investment need not necessarily be at arms length, it must be on an arms length basis. The requirement applies not to the identity or relationship of the parties, but to the terms and value of the transaction. Broadly, this means that while transacting with related parties does not, of itself, constitute a breach of section 109, trustees must ensure that the investment is made or realised at an appropriate commercial value and that the investment returns reflect market returns. It may also be necessary to ensure that any ongoing obligations are commercially reasonable or at least no more favourable to the other party than what they could expect in an arms length transaction. 5. the in-house assets rule contained at section 71 of SIS places limits on certain related party holdings. It states that no more than 5% of the market value of a fund s assets may comprise: loans to or investments in related parties of the fund; investments in related trusts of the fund; an asset of the fund subject to a lease arrangement between the trustee and a related party of the fund. The in-house assets rule operates in conjunction with the remaining investment activity restrictions. However, where the investment is in a related trust covered by section 67(4A), the investment will constitute an in-house asset only if the underlying asset would have been an in-house asset were it an asset of the fund itself. 25

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27 5. TAXATION AND DUTY CONSEQUENCES Up until the recent changes in SIS, many superannuation portfolios were devoid of the many potential benefits of direct property investment due to their inability to borrow money. As a result, many Australians have had no choice but to invest in real estate outside of the taxefficient superannuation domain and had lacked the ability for their superannuation portfolio to potentially generate greater returns through a geared SMSF investment strategy. Buying property through an clients SMSF not only enables you to leverage your clients current superannuation assets, it also provides the added benefits of both asset protection and tax efficiency. ASSET PROTECTION Subject to the specific anti-avoidance rules in legislation such as the Corporations Act and the Bankruptcy Act, acquiring and accumulating assets in a superannuation fund can protect those assets from commercial and litigation risks that may otherwise face the members. As such, any potential growth and future income may be enjoyed in a safe, secure and Bankruptcy Act friendly environment. TAX EFFICIENCY The current Australian taxation laws offer significant tax benefits for acquiring growth assets in superannuation. For instance: There is a maximum of 10% Capital Gains Tax on the sale of property if the property is held for over 12 months in the accumulation phase and there is ZERO Capital Gains Tax if the property is sold in the pension phase; 27

28 There is a maximum of 15% tax on any rental income received from the investment property during the accumulation phase and 0% tax for rental income received in the pension phase; By salary sacrificing into a SMSF, one may effectively receive a 100% tax deduction at their full marginal rate of tax on any contributions made up to the contributions cap (note: salary sacrificed contributions may be subject to up to 15% tax contribution tax); The interest expense along with other property related expenses including any depreciation allowance become 100% tax deductible within the superannuation fund and may potentially reduce the amount of the 15% contribution tax to nil; It is much more tax effective than simply negative gearing as, after the 15% contribution tax, tax deductible contributions may be made to both principal and interest repayments In fact, by using pre-tax dollars to make principal repayments against the loan on the investment property, one may quite potentially own the property sooner; One may potentially receive a more tax effective retirement income as compared to property investment held outside of superannuation as once over the age of 60, there is ZERO TAX on withdrawals and pension income from superannuation assets; As the beneficial owner of the property asset, a SMSF will enjoy the Land Tax Free Threshold in each Australian State. STAMP DUTY In NSW, the Duties Act 1997 (DA 1997) imposes stamp duty on certain transactions and documents. Specifically, stamp duty is imposed on a transfer of dutiable property (ie land and certain shares), and other transactions, such as an agreement for the sale or transfer of dutiable property and a declaration of trust over dutiable property. 28

29 Duty on transfers of shares or units quoted on the Australian Stock Exchange, or other recognised stock exchanges, was abolished in NSW with effect from 1 July 2001, while transfers of unlisted marketable securities remain subject to duty in NSW. Section 55 of DA 1997 provides that certain transactions in relation to dutiable property vested in an apparent purchaser (the special purpose trust Trustee) are chargeable with nominal stamp duty. Firstly, nominal stamp duty of $10 is chargeable when a declaration of resulting trust is made by the EWT Trustee for the EWT in respect of dutiable property vested, or to be vested, in the EWT Trustee upon trust for the super fund. The super fund, and not the EWT, must have actually provided the purchase money for the trust property, including paying the deposit and borrowing funds to purchase the property. Secondly, nominal stamp duty of $10 would also be chargeable, when the legal title to the property is transferred from the EWT to the fund, which would occur after the final cash instalment payment is made by the fund. In order to rely on the section 55 DA 1997 concession, there are certain documents that need to be prepared to support the transfer of legal title of the dutiable property from the EWT Trustee to the fund, which have been incorporated into our EWT package. Stamp duty will be payable at both levels if the evidentiary requirements relating to section 55 of DA 1997 have not been satisfied. The respective concessional provisions in other states are section 34 of the Duties Act 2000 (VIC), section 39 of the Duties Act 2001 (TAS), section 56 of the Duties Act 1999 (ACT) and section 73AA(1)(f) of the Stamp Act 1921 (WA) and Section 117 Duties Bill 2007 (WA). In Northern Territory, whilst there is no specific legislation, as a matter of administrative practice an exemption from conveyance duty is granted where there is evidence that there was an intention to create a trust and that the purchase money was provided by the beneficiary (i.e. the super fund). 29

30 There does not appear to be a comparable concessional provision in either Queensland or South Australia therefore ad valorem duty would be payable upon any transfer of the Asset by the EWT to the fund. In Queensland, however, the fund may be able to take advantage of the provisions of Section 22(3) Duties Act 2001 Qld which provides where a person is appointed as an agent to purchase an asset which is a dutiable transaction, with all funds for the purchase being made available by the principal then any subsequent transfer of that asset to the principal would not attract stamp duty. In order to rely on the section 22(3) of the Duties Act 2001 Qld concession, there are certain documents that need to be prepared to support the arrangement and the subsequent transfer of legal title of the dutiable property from the EWT Trustee to the fund, which have been incorporated into our EWT package. The role and activities undertaken by the EWT Trustee will affect whether stamp duty and other tax concessions will be available. If a EWT Trustee is more than a mere apparent purchaser the stamp duty concession may be denied. Stamp duty will apply to the acquisition of property by the trustee company from a third party vendor. Duty is payable on the higher of the consideration and unencumbered market value of the property. The rate of duty varies from State to State and is applied on a sliding scale. The highest effective rate of duty in each State and Territory under the laws in force at present are as follows: State Stamp Duty Rate New South Wales 5.5% Victoria 5.5% Queensland 4.5% Western Australia 5.4% South Australia 5.5% Tasmania 4% Australian Capital Territory 6.75% Northern Territory 5.4% 30

31 Other government fees and charges apply to the acquisition of property, for example, fees charged by the relevant land titles office to register the transfer of the property. In some States these fees are calculated on an valorem basis. In relation to the transfer of property from the trustee company to the SMSF, an exemption and/or a concession may apply depending upon the laws of the revenue authorities at the time of transfer. Under current law, exemptions and concessions exist in each State for transfers of dutiable property from a trustee to a beneficiary in certain circumstances. The legislative and administrative requirements differ in each State and it is recommended that clients seek specific advice regarding these exemptions. Each case needs to be considered separately taking into account all the facts and circumstances of the transaction. Mortgage duty at rates of up to 0.45% of the loan amount may also be payable depending on the State in which the property is located (e.g. Victoria does not charge mortgage duty). It is believed that Mortgage duty will progressively be abolished throughout Australia over the next few years. LAND TAX Where a super fund intends to acquire real property, State land tax may apply. Advice should be sought from a solicitor at the time of acquiring the property as to potential land tax liability and obligations. Land tax is payable on the ownership of property on an annual basis. Land tax is payable in all Australian States (except the Northern Territory) and is calculated on the combined value of all the taxable land owned by the owner on the relevant taxing date. Thresholds are available in some States, and, where available, land tax is calculated on the combined value of all taxable land owned that is above the threshold, at the relevant rate. Land values are those recorded by the Valuer General s department in the relevant State. Land tax is assessed on a sliding scale and rates differ depending on the capacity of the owner (individuals or trustees/companies). The thresholds and effective rates of land tax in 31

32 each State and Territory for residential properties generally change annually. The thresholds and highest effective rates for the 2008 land tax year are: State / Territory Threshold Tax Rate Taxing Date/s ACT No 1.4% 1 Jul, 1 Oct, 1 Jan, 1 Apr New South Wales $359, % 31 December Queensland $350, % 30 June South Australia $110, % 30 June Tasmania $25, % 1 July Western Australia $250, % 30 June Victoria $225, % 31 December In all States, the owner of the land is the person who has the land tax liability. In this context, owner refers to the person in whom the legal estate of the taxable land is vested or any/or person entitled to the land for an estate of freehold in possession. In New South Wales the issue of where the liability for land tax falls depends on whether the trustee company is classed as a special trust. If the trustee company is classed as a special trust then the land tax liability falls on the trustee company and no land tax threshold can be claimed. If the arrangement is not that of a special trust, as it is believed to be through a superannuation environment, then the tax-free threshold can be claimed. INCOME TAX At the EWT level The taxation of trust income is governed by Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). As the super fund is presently entitled to the whole of the net income of the trust estate under subsection 97(1) of ITAA 1936, the trustee for the EWT will not be taxed on the income rather the super fund will be taxed. Accordingly, the super fund will need to include this amount in its assessable income after deduction of all relevant deductions. 32

33 At the Super Fund level Division 295 of ITAA 1997 prescribes an exclusive code for the taxation of super funds. The taxable income of a complying super fund consists of a non-arm s length component and a low tax component. The non-arm s length component is taxed at the highest marginal rate of 45% whereas the low tax component is taxed at the concessional rate of 15%. The non-arm's length component consists of non-arm's length dividends received from private companies, fixed interest trust distributions, and any income derived from transactions where the parties are not dealing with each other at arm's length. This component is reduced by any deductions attributable to that income and is then taxed at the highest marginal rate of 45%. The EWT Agreement gives the super fund the right to receive all dividends and franking credits of the underlying asset in shares. The super fund must include the dividends and franking credits attached to the dividends, in its assessable income, however the super fund would be entitled to a tax offset equal to the franking credit. A refund of excess franking credits in respect of the dividends is available to the super fund where the total franking credits exceed its tax liability. The dividends indirectly paid to the super fund by a private company will be non-arm s length income unless it can be objectively proven that the amount is consistent with an arm s length dealing. In order to establish whether an amount is consistent with an arm's length dealing, regard must be had the following factors: the value of shares in the company that are assets of the super fund; the cost to the super fund of the shares on which the dividend was paid; the rate of that dividend; whether the company has paid a dividend on other shares in the company and, if so, the rate of that dividend; whether the company has issued any shares to the entity in satisfaction of a dividend paid by the company (or part of it) and, if so, the circumstances of the issue; and any other relevant matters. 33

34 As a result, the dividend will either be taxed at 15% or 45% depending on whether the dividends paid to the super fund is or is not consistent with an arm s length dealing. Furthermore, the EWT arrangement provides the super fund with the right to receive all income earned on the underlying asset, such as rental income from an investment property. All income derived from the underlying asset will be included in the super fund s assessable income under section 97 of ITAA A trust distribution received by the super fund will only be non-arms length income of the super fund, if the following conditions are satisfied: (i) the super fund acquired the fixed entitlement under a scheme, or the income was derived under a scheme; (ii) the EWT and super fund were not dealing with each other at arm s length; and (iii) the amount of the income is more than the amount that the super fund might have been expected to derive if those parties had been dealing with each other at arm s length. As the super fund is investing in an asset through a bare trust, all dealings of the trust would need to be on an arm s length basis, to ensure that the income is not considered to be nonarm s length income and taxed at the concessional rate of 15% rather than 45%. DEDUCTIONS The deductibility of interest, and other expenditure, incurred by a super fund is governed by the general deduction provisions of section 8-1 of ITAA Accordingly, interest expenses are deductible to the extent that it is incurred in gaining or producing assessable income. However, an interest expense will not be deductible to that extent that subsection 8-1(2) of the ITAA 1997 applies. 34

35 The super fund will borrow money from a third party lender pursuant to a loan agreement. Where the super fund borrows money to purchase an income producing asset, such as an investment property or shares, interest on the loan will be deductible under section 8-1 of ITAA Where the super fund borrows money to purchase a non income producing asset, such as a painting, interest on the loan would not be deductible under section 8-1 of ITAA 1997, because the interest expense would be of a capital nature. Moreover, a member, or the EWT trustee, may borrow money from a third party lender and on lend (on an arms length basis) these funds to the super fund in order to provide the super fund with sufficient funds to complete the transaction. In these circumstances, the member, or the EWT trustee, is entitled to claim a deduction for the interest payments it had made in respect of the money which it had borrowed and on-lent these funds, to the extent that the interest payments are incurred in gaining or producing assessable income. Section 51AAA of ITAA 1936 will not apply to deny the super fund a deduction for the annual interest payments allowable under section 8-1 of the ITAA 1997, notwithstanding any net capital gains being included in the super fund s assessable income. Borrowing expenses (such as loan establishment fees, stamp duty, legal expenses etc) are deductible under section of ITAA 1997 to the extent that the borrowed moneys are used for the purpose of gaining or producing assessable income. Any fees paid in establishing the loan should be deductible under section of the 1997 Act. On the assumption that the loan is over 5 years, the fee should be deductible: over the first five years of the loan (if the loan is repaid early, the amount will be deductible over the actual period of the loan); or if the fees are $100 or less, the fee may be deductible in the year in which they are paid. 35

36 Mortgage discharge expenses are deductible under section of ITAA 1997 provided the borrowed moneys were solely for the purpose of producing assessable income. Capital Allowance Deductions Division 40: Capital allowance deductions may be claimed by the SMSF under Division 40 of the 1997 Act (provided certain conditions are met) regarding the cost of acquiring depreciating assets of the property. The commissioner has provided a general guidance regarding the items that constitute depreciable assets in residential rental properties in Income Tax Ruling TR 2004/16. Depreciation deductions are claimed over a depreciable asset s effective life and the SMSF may select to choose to depreciate via the prime cost method or the diminishing value method. Capital Allowance Deductions Division 43: Capital allowance deductions may be claimed under Division 43 of the 1997 Act on construction expenditure incurred in building and structural improvements. The rate at which these depreciation deductions may be claimed is either 2.5% or 4% depending on when construction of the buildings and improvements commenced. For buildings and improvements constructed after 15 September 1987 the rate is generally 2.5%. The transfer of the buildings and structural improvements upon which Division 43 deductions have been claimed by the trustee of the EWT (to either the SMSF or to a third party purchaser) should not result in any gain or loss being recognised under Division 43. Post transfer, the transferee should be able to directly claim a deduction for the remaining Division 43 capital allowance (if any) relating to the property. Division 6C of the 1936 Act Since the SMSF will be the entity that is deriving rent from property, the trustee company holding legal title will not be affected by the provisions of Division 6C of Part III of the 1936 Act which, when applied, has the effect of taxing a trust as a company. 36

37 Divisions 250 of the 1997 Act: Division 250 of the 1997 Act contains anti-avoidance provisions that limit the circumstances in which a taxpayer can claim capital allowance deductions for an asset leased to: a tax preferred entity being an exempt Australian government agency, exempt foreign government agency or other types of exempt entities; or a non-resident that uses the asset principally outside Australia. Generally, the property acquired will be located within Australian and will be either rented to an Australian resident or leased to an Australian entity for commercial purposes. Therefore, it is unlikely that these provisions would apply. Capital Gains Tax (CGT) The CGT cost base of the property includes the total purchase price which relates to the land and buildings (i.e. excluding Division 40 depreciating assets) and also: incidental costs of acquisition and disposal (i.e. stamp duty, the Application Fee, the Establishment Fee, any registration fees and legal costs); and certain other non-deductible costs of ownership. This cost base is reduced by the amount previously claimed as a deduction under Division 43. Investors will make an assessable capital gain/loss equal to the amount by which the sale proceeds for the eventual sale of the property exceeds the cost base of the property. Capital losses: Capital losses can only be offset against capital gains assessed under part 3-1 of the 1997 Act and cannot be offset against other types of income. 37

38 At the EWT level The date of acquisition of the CGT asset by the super fund under section of ITAA 1997 is the date on which the EWT Trustee entered into the contract for the acquisition of the CGT asset. CGT event A1 would be triggered when the EWT disposes of a CGT asset pursuant to subsection (1) of ITAA A CGT asset is described in very broad terms, pursuant to section of ITAA 1997, as any kind or property, or a legal or equitable right that is not property. This includes property, shares, and collectables. A disposal occurs if there has been a change in ownership of the CGT asset, whether because of some act or event of by operation of law under subsection (2) of ITAA However, CGT event A1 would not occur when the EWT transfers the legal title of the asset to the super fund, upon payment of the final cash instalment, by virtue of subsection (7) of ITAA Accordingly, the loan would be repaid and the mortgage over the asset discharged. At the Super Fund level CGT event A1 would occur if the super fund defaulted in making an instalment payment and the asset is sold by the lender exercising its power of sale of the asset. The lender has no recourse against the super fund to recover a shortfall where the sale proceeds are insufficient to repay the loan. As a result, the super fund would need to reduce the cost base of the CGT asset by the shortfall amount under subsection (3) of ITAA CGT event A1 would also occur if the super fund sold the asset after acquiring the legal title to the asset. The super fund would make a capital gain from the disposal of the asset where the capital proceeds were greater than the asset s cost base. A capital loss would be made by the super fund where the capital proceeds were less than the asset s reduced cost base. Division 115 of ITAA 1997 provides that a complying super fund would be able to reduce any capital gains arising from CGT event A1 by 331/3 percent (after applying any current year or carried forward capital losses) provided the asset has been held for more than 12 months. While the super fund is in accumulation phase, the super fund would pay capital 38

39 gains tax at the rate of 10 per cent, however the super fund would 0 per cent if the super fund was in pension phase. GOODS AND SERVICES TAX (GST) GST generally applies at a flat rate of 10% to the provision of services by an entity registered for GST. It applies to management and advisory services supplied to anyone. Loan transactions: Some supplies are input taxed, that is, no GST is charged on the supply. The making of a loan (including consideration for a loan such as a loan establishment fee) will not have GST charged on the supply and therefore not claimable by the client. Property, generally: Any GST liability on the acquisition of the property from a third party vendor lies with the third party vendor. As such, the supply of residential property is input taxed unless the premises are new residential premises or commercial residential premises. Neither the SMSF nor the trustee company will be able to claim an input tax credit for any GST charged on the acquisition of the property. The lease of the property will also be input taxed where it is a supply of residential premises used predominantly for the purposes of residential accommodation. Full input tax credits will not be available for any GST paid in respect of acquisitions relating to the lease of the property (including property management fees, letting fees and repair expenses) even if the SMSF is registered or required to be registered for GST. Likewise, the sale of the property to a third party should either be outside of the scope of the GST or input taxed if the Property is residential premises used predominantly for residential accommodation (unless the premises are new residential premises or commercial residential premises. 39

40 At the EWT level GST is payable on taxable supplies from 1 July 2000 pursuant to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). An entity (EWT and super fund) will make a taxable supply if the following conditions in section 9-5 of the GST Act are satisfied: it makes the supply for consideration; the supply is made in the course or furtherance of an enterprise that it carries on; the supply is connected with Australia; and it is registered, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. An enterprise is defined in subsection 9-20(1) of the GST Act as an activity, or series of activities, done: (a) in the form of a business; or (b) in the form of an adventure or concern in the nature of trade; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or (d) by a trustee of a complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund. Subsection 184-1(1) of the GST Act treats a trust and a superannuation fund as an entity for GST purposes. Subsection 184-1(2) of the GST Act provides that the trustee of a trust or superannuation fund is deemed to be an entity consisting of the person who is the trustee at any given time. The activities of the EWT trustee are essentially passive in nature and only have minor active duties to perform under the EWT, such as entering into leases, surrendering leases and other dealings with lessees of the asset. As the EWT is a bare trust, the EWT trustee does not carry on an enterprise for GST purposes so there is no need to register for GST. 40

41 If the EWT Trustee carries on other than minimal activities, then it is likely to be considered to be carrying on an enterprise for GST purposes and may be required to register for GST. At the Super Fund level The trustee for the super fund will only be required to register for GST purposes if the conditions in section 9-5 of the GST Act are satisfied. Generally, super funds are prohibited from carrying on a business, but are taken to be carrying on an enterprise for GST purpose, and can therefore register for GST, even if registration is not compulsory. There are three types of exemptions from GST being transactions not subject to GST, GST free transactions and input taxed transactions. The EWT is created by the EWT trustee acquiring the legal title to the asset after first executing the declaration of trust. There are no GST consequences at this stage because the EWT trustee is not carrying on any enterprise in respect of the asset. Similarly, there are no GST consequences when there is a transfer of trust property back to the super fund upon the final instalment payment. Residential Property The super fund trustee may borrow moneys to fund the purchase of residential property to be held on trust for the benefit of the super fund. The sale of residential property by the super fund is input taxed and no GST payable by the third party, unless the sale is of a new residential premises in which case GST will be payable by a third party. Accordingly, no GST is payable by the super fund on the rent received from the residential property and no input tax credits can be claimed on the GST component of supplies purchased by the super fund that directly relate to the residential property such as legal fees. Commercial Property Furthermore, the super fund may also acquire a commercial property to be held on trust for the benefit of the super fund. Where the super funds purchases a commercial property that is leased, the GST-free concession for the supply of a going 41

42 concern may be available to the super fund, provided the conditions in section of the GST Act are satisfied. The conditions that need to be satisfied are: the supply must be for consideration, the recipient must be registered or required to be registered for GST, and the supplier and the recipient must have agreed in writing that the supply is of a going concern; the supply must be under an agreement which the supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise; and the supply must be under an agreement which the supplier carries on, or will carry on, the enterprise until the day of supply (whether or not as part of a larger enterprise carried on by the supplier). If these conditions are not satisfied, the vendor of the commercial property will be liable for the GST, but the purchaser (that is, the super fund) will be entitled to an input tax credit for the GST, provided the super fund is registered for GST. The super fund must charge GST on leasing the commercial property to third parties because the lease is treated as the supply of commercial property. GST will also apply to the subsequent sale of the commercial property to a third party, with the amount of GST payable by the third party depends on whether the super fund uses the margin scheme method or the general method. Provided the super fund was registered for GST, it can claim full input tax credits on the GST component of supplies purchased by the super fund that directly relate to the commercial property, such as legal fees and repairs and maintenance. Shares The super fund may also acquire shares to be held on trust. The provision, acquisition or disposal of listed und unlisted securities are a financial supply. As financial supplies are input taxed, no GST is payable by the super fund on the acquisition or disposal of shares in a company. Where the super fund uses a 42

43 stockbroker to sell its shares, any brokerage fees charged by the stockbroker will be subject to GST. If the reduced input tax credit scheme applies, the super fund would be able to claim 75% of GST paid as a reduced input tax credit, provided the super fund is registered for GST. Tax File Number Registration and GST Registration The EWT Trustee will not have to apply for a TFN or register for GST purposes since the activities of the bare trustee are essentially passive in nature since the EWT Trustee either has no active duties to perform or only minor active duties. Accordingly, the EWT Trustee deals with the property as agent for the super fund, then the acquisition or supply of the property is made by the super fund, not the EWT trustee. Therefore the superfund has the relevant obligation and entitlements under the GST Act. ANTI-AVOIDANCE PROVISIONS The general anti-avoidance provisions contained in Part IVA of the ITAA 1936 applies to schemes entered into with the sole or dominant purpose of obtaining a tax benefit. Where Part IVA applies, the Commissioner has the discretion to cancel the tax benefit obtained by the super fund in connection with the scheme and impose penalty tax. Part IVA of the 1936 Act is the general anti-avoidance rule. For it to apply to an investor there must be: a scheme ; a tax benefit obtained by the investor in connection with that scheme; and based on a consideration of the matters set out in section 177D(b) of the 1936 Act, a conclusion formed that, objectively speaking, the dominant purpose of any person who entered into or carried out the scheme was to enable the investor to obtain that tax benefit. Provided the arrangement was entered into as an ordinary commercial transaction, Part IVA would not apply. 43

44 NOTES 44

45 6. AN INNOVATIVE AND INTELLIGENT STRUCTURE The Equiti Warrant structure has been developed under a collaborative effort of many legal, superannuation, property, financing and taxation experts to enable a SMSF to take advantage of the new provisions of the SIS whilst, at the same time, limiting the exposure of the superannuation investments. Many Australian s have had little choice but to acquire direct property outside of their superannuation vehicles and have lacked the ability for their superannuation portfolio to potentially generate greater returns through a geared SMSF investment strategy. As a financially engineered structure, the Equiti Warrant structure provides an ability by which a SMSF may include some form of direct property ownership within its investment portfolio in largely the same way that one would purchase an investment property outside of their superannuation. In fact, the structure has been designed to be simple, straight-forward and effective: Your client selects a suitable investment property, The Equiti Warrants structure is established (along with a limited recourse loan facility arrangement); Their SMSF receives the net rental income and this goes towards meeting both the property related expenses and the loan repayments. Their SMSF will ultimately benefit from any capital growth along with any other benefit that may be associated with a direct investment in residential or commercial property. The Equiti Warrants structure is usually established with a Corporate Trustee and with the SMSF as the sole beneficiary. 45

46 This Corporate Trustee may have all members of the superannuation fund as directors and shareholders and thus gives the members complete control over the trust and its assets. As such, the EWT arrangement not only satisfies the specific requirement of the SIS, it allows for your client to retain 100% complete control without the need for an external, and often costly, trustee. The Trustee of the EWT obtains funding to acquire the property from the following three sources: 1. a secured loan that satisfies specific lending criteria which may be up to 80% of the appraised property valuation for residential property and 75% of the appraised property valuation for commercial property. This particular financing facility can be sourced, arranged and managed by Equiti Home Loans as mortgage managers or via any other suitable lending institution that is satisfied with the lending structure; 2. a flow-through loan limited recourse facility from the Trustee of the EWT to the SMSF with essentially the same commercial terms as the secured loan. These loan proceeds are then provided to the Equiti Warrant Trust to enable it to purchase the property. This important aspect of the financing structure is essential so that the specific requirements of the SIS are satisfied; 3. a first instalment payment from your clients SMSF to the Equiti Warrant Trust for no less than the remaining 20% of the property valuation plus the regular property acquisition costs. This essentially works in much the same way in which one would pay a deposit and make an equity contribution on a property outside of superannuation. In light of the proposed borrowing structure that is permitted, it is important to get the structure absolutely right at first instance so as to avoid any contravention of the SIS and other legislations. 46

47 It is vitally important for satisfying the SIS that the loan is limited to recourse against the property in that the lender may only recover outstanding monies by realising the real estate asset or exercising the rights that the superannuation fund has in relation to that asset. The following Diagram 1 shows the movement of the initial funds required to acquire the property via the Equiti Warrant structure: The correct flow of funds during the course of this transaction is crucial to enable the superannuation fund to take full advantage of the benefits that can be gained by using this structure. By following this approach, the trustee of the EWT becomes the legal owner of the property but holds it for the benefit of the superannuation fund via what is commonly referred to as a Bare Trust arrangement. As you already may know, a trust separates ownership and control, with the beneficiaries (or unit holders) entitled to the profits and assets of a trust. A Bare Trust, however, reverses the roles to a degree because the beneficiary of a Bare Trust has control over the trustee. With a Bare Trust, the trustee follows the direction of the beneficiary. To an onlooker, the asset may appear as though it belongs to the EWT Trustee because their name appears on all the legal documents and therefore appears to have legal control over the asset. 47

48 Whereas, in fact, as per the deed of a Bare Trust, the beneficiary can, at any time, instruct the trustee to transfer the assets into the beneficiary s name. Unlike other types of trusts, the trustee of a Bare Trust is not required to do anything with the asset. The trustee just holds the asset and must do whatever the beneficiary says regarding the asset. When the beneficiaries want the asset back they simply request for it to be transferred. This legal and beneficial ownership is demonstrated in Diagram 2 below: Once established, the superannuation fund receives all income derived from the asset and enjoys all the benefits of ownership. The superannuation fund has the right to call upon the trustee of the EWT to transfer the real estate asset/s to the superannuation fund upon payment of its Final Instalment. Should the SMSF choose to acquire the asset, the structure allows for the legal ownership of the property to be transferred to the SMSF and will not trigger a Capital Gains Tax event. It has also been structured in such a way that, if the procedures are correctly followed, to take advantage of stamp duty concessions that may be available upon the second transfer of the asset to the superannuation fund. 48

49 There is, however, no formal SIS obligation upon the superannuation fund to acquire the asset at the end of the instalment term and, in fact, there is no binding obligation for the SMSF to make any further instalments to the EWT or to its Trustee. Diagram 3 below shows the likely movement of money after the settlement of the property: Over a period of time, the superannuation fund can elect to make regular (or irregular) instalment payments to eliminate the debt and acquire the asset. These instalments from the SMSF can be sourced from: 1. 9% Employer Contributions (SGC); 2. Salary Sacrifice; 3. Personal Contributions; 4. Government Co-Contributions (if applicable). The Equiti Warrant structure is a private instalment arrangement that satisfies all the legal and financing requirements for a SMSF to acquire a beneficial interest in a geared investment property and will provide professional advisers the opportunity to recommend the structure to clients they believe would be most suitable for a geared investment strategy within their SMSF. 49