Removing the requirement to transfer asset to SMSF post-borrowing

The ATO has issued a draft legislative instrument that, if finalised, will remove the need to transfer an asset from a custodian trust to the SMSF once the limited recourse borrowing arrangements have concluded.

The ATO has held the view that the exception in section 71(8) SIS which exempts the investment by an SMSF in a related trust which holds the asset under an LRBA arrangement from being an in-house asset does not apply once the borrowing is paid down. This has meant that the asset must be transferred from the custodian trust to the SMSF at the conclusion of the borrowing.

The ATO has identified problems generally with these arrangements. For example, section 71(8) strictly doesn't apply initially when the trust is created if the asset which is the subject of the borrowing is not yet in the trust, or where the asset is in the trust but the borrowing hasn't been drawn down. Also, at the end of the borrowing, even if the trustee intends to transfer the asset to the SMSF, there will be a gap between the date when the borrowing is paid down, and the date when the asset is transferred out of the custodian trust. In each of these instances section 71(8) doesn't save the custodian trust from being treated as an in-house asset.

The draft legislative instrument will cure these problems. It will provide that the investment in the custodian trust is not an in house asset during the initial set up period provided it is reasonable to expect that the arrangement will satisfy the section 71(8) requirements. Moreover, the legislative instrument will remove completely the need to move the asset out of the custodian trust at the conclusion of the borrowing.

Interestingly the legislative instrument is intended to be back-dated to 24 September 2007 - when the original LRBA provisions came in.