A narrow interpretation of a change to the NSW Duties Act by the Duties Office may see SMSFs miss out on some of the flexibility of the change where they look to borrow to buy an investment property, says a law firm.
Townsends Business & Corporate Lawyers principal Peter Townsend said in September last year when changes were made to section 18 of the NSW Duties Act, it appeared it would provide more flexibility to SMSFs borrowing to buy investment property and entering into an LRBA.
“The new arrangements seemed to allow a Fund Trustee to sign the contract of sale and then later incorporate a Holding Trustee so that, at settlement, title could be transferred to the Holding Trustee,” Mr Townsend explained.
“Having a holding trustee in place before signing the contract was cumbersome and expensive for SMSFs, especially where the property might be sold at auction and the SMSF could not even be sure it would be the successful buyer and therefore need the holding trustee.”
Since then, the Duties Office appears to have taken a narrow and restrictive interpretation, however, said Mr Townsend, and requires the custodian company, also known as the holding trustee, to be in existence prior to the fund trustee signing the contract of sale.
“We take a different view. In our view, limited recourse borrowing arrangements are resulting trusts whereby the custodian holds title to a property where the money was paid by the SMSF. Such a trust comes into existence at the time title is transferred to the custodian and not earlier,” he said.
“A custodian is not acting as a custodian on behalf of someone until title of the asset is transferred to it. It therefore matters not that the custodian may not have been in existence at the time the SMSF signed the purchase contract. We believe our view to be consistent with a wider interpretation of the legislation and more in keeping with the purpose of the change.”
Mr Townsend said while the legislation could have been drafted and expressed more clearly, a narrow interpretation of the section seems to provide limited practical application of the section in property transactions.
“There may be additional developments in relation to the interpretation of this section in the future however, for now trustees may wish to take a conservative approach, set up a custodian company before signing the contract and have the holding trustee sign as a purchaser without relying on s18(3)(d)(iii),” he said.
“In the event that [an] SMSF wishes to rely on s 18(3)(d)(iii), they should ensure the custodian company is incorporated with ASIC before a contract of sale is signed.”