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SUPERANNUATION SECURITY TRUSTS

These documents are also referred to as Bare Trusts, Asset Acquisition Trusts.

MAJOR FEATURES OF THE ASSET ACQUISITION TRUST

How this Asset Acquisition Trust works

The sole purpose of this Asset Acquisition Trust is to enable SMSF Trustees, to purchase an asset (ultimately to be held on trust by the SMSF Trustees for one or more members of the Fund) (the Superannuation Asset) using the debt instalment procedure set out in section 67A of SIS.

It is essential that the procedure set out in section 67A is followed in respect to the acquisition of the SMSF Asset, otherwise it is possible that the Super Fund may become non compliant.

The procedure to acquire the relevant Superannuation Asset, is as follows:

1. the Super Fund must have been established. The Fund Members that participate in the acquisition of the Superannuation Asset we refer to as the Participating Members;
2. there must be a Superannuation Asset being acquired, not an asset being refurbished/improved/refinanced;
3. The SMSF Trustees must ensure that the acquisition of the Superannuation Asset is permitted by the SMSF's Deed and also investment strategy and will not breach the Regulations. All deeds and investment strategies that have not been amended since 24 September 2007 will need to be amended to allow for borrowing.

   In particular, the SMSF TrusteeSMSFTrustee2LegalName:s must have considered:

   • the Sole purpose test - any investment must be assessed carefully to ensure that it is being made for the purpose of the provision of Member benefits, and not for some other purpose;
   • In-house asset rules - these still apply;
   • the Arm's length - if a Member is providing the loan funds, the terms and conditions of the borrowing arrangement must effectively be as if negotiated at arm's length;
   • Related party acquisition rule - the prohibition of acquiring assets from Members and related parties. There are exceptions including the acquisition of business real property and listed securities (if acquired at market value);
   • Cash flow requirements - if the income to be received from the Superannuation Asset will be insufficient to meet the interest payments due under the Finance Agreement, there must be adequate income from other assets owned by the Fund that may be used to meet the interest payments;
   • Commercial issues - if on analysis the investment does not provide commercially acceptable returns, this may raise both investment strategy and sole purpose test concerns;
   • Tax considerations - Capital Gains Tax, GST (on assignments to the SMSF Trustees), land tax and stamp duty.
4. please make sure that the reasoning behind the acquisition of the Superannuation Asset is documented. This means valuations, correspondence, minutes, and of course a consideration of the Super Fund's investment strategy;

5. the funds required to purchase the Superannuation Asset will be provided by:

   • contributions by the Participating Members via their Accumulation Accounts; and
   • the balance of the funds will be provided by a Financier/Lender (see below);
6. the SMSF Trustees establish the Security Trust to acquire the Superannuation Asset. In WA the Security Trust needs to be in place before any contract (such as an Offer and Acceptance for a property) is signed to purchase the Superannuation Asset;

7. following the amendments to SIS (effective from 6 July 2010) the Superannuation Asset must be the only asset of the Security Trust. The new law makes it explicit that borrowed money applied to expenses incurred in connection with the borrowing or acquisition (such as loan establishment costs or stamp duty), or expenses incurred in maintaining or repairing the single acquirable asset (but not expenses incurred in improving the acquirable asset), is allowed.

   What is a single acquirable asset? Loans to purchase multiple non-identical assets are not permitted. The definition permits borrowing arrangements over a collection of assets that are identical and have the same market value.

   None of the following are permitted:

   • Multiple titles under one borrowing arrangement is prohibited (eg a property & a car park if the car park is on a separate title). Buying a property that has 1 title is fine;
   • The property cannot be subdivided during the life of the loan. This will create 2 titles;
   • ATO (Superannuation technical minutes, September 2010) have flagged issues with off the plan purchases – is it a replaceable asset? The answer depends on how the contract is worded and when monies are paid. If the character of the asset changes, ie a contractual right turns into a finished property, there may well be a replacement asset. If the replacement asset does not fall within s67B, the SMSF Trustees have a problem.
   • The property cannot be improved or enhanced in anyway while the loan is still in place (including via funds in the accumulation account). This will change the character of the property and is therefor not allowed.

   Examples of a collection that are NOT a single acquirable asset:

   • shares in a single company that have different rights eg ordinary and preference shares.
   • units in a unit trust of different classes that have different rights attached to them or are potentially subject to differing trustee discretion;
   • shares in different entities.

   For further information please see SMSFR 2012/1 Self Managed Superannuation Funds: limited recourse borrowing arrangements – application of key concepts.

8. The Security Trustee may now sign a contract to purchase the Superannuation Asset. If the circumstances require, the contract is to be conditional upon such things as the Security Trustee obtaining finance or the Participating Members disposing of other assets held in their Accumulation Accounts in order to raise the necessary funds.
9. the SMSF Trustees to enter into an agreement with the Lender (the Finance Agreement) to obtain sufficient funds to enable the Security Trustees to acquire the Superannuation Asset;

10. the Finance Agreement (to be entered into by the SMSF Trustees) is to provide (amongst other terms and conditions) the Lender with limited recourse against the SMSF Trustee, to only the Superannuation Asset. Taxpayer Alert 2008/5 shows each of us that the ATO is watching these loan facilities very closely:

    "The borrowing is of a limited-recourse nature, noting particularly that any recourse that the lender has under the arrangement against the trustee must be limited to rights relating to the asset acquired (or any replacement). In other words, the lender is able to recover monies where there is a default on the borrowing by repossessing or disposing of the asset acquired (or any replacement), but cannot recover such monies through recourse to the SMSF's other assets".

    Care also needs to be taken when a Member or associate provides a guarantee to support the loan taken -

    a personal guarantee (from a Member)..... may result in recourse being made to the assets of the SMSF other than the asset acquired (or any replacement) in the event that the guarantee is enforced against the trustee as the principal debtor, contrary to the intent that the exception in subsection 67(4A) of the SIS Act only applies to limited recourse borrowings..."

11. the Security Trustee will be the legal owner of the Superannuation Asset;
12. the SMSF Trustees will be the beneficial owner of the Superannuation Asset. As such, if the Superannuation Asset is real estate, the SMSF Trustees should lodge a caveat or declaration of trust on the title;
13. the Security Trustees will pay to the Lender the agreed interest and instalments over the term of the Finance Agreement;
14. the SMSF Trustees will pay the Lender by instalments over the term of the Finance Agreement;
15. if there is a default under the terms of the Finance Agreement, the Lender does not have recourse to any other assets of the Security Trust - only the Superannuation Asset (or any Replacement Asset). The Participating Members may also be required to provide the Lender with additional security, however the circumstances of each transaction and the security requirements of each Lender, will be different;
16. if the loan is being made by a Member or associate of a Member then additional caution needs to be taken. Again Taxpayer Alert 2008/5:
    • monies advanced by a member or related party at zero or less than a commercial rate of interest could be characterised as a contribution to the SMSF. This may result in the trustee/member having to pay excess non-concessional contributions tax under Division 292 of the Income Tax Assessment Act 1997;
    • monies advanced by a member or related party at greater than a commercial interest rate of interest may result in:

      - a breach of the sole purpose test outlined in section 62 SISA, on the basis that the excessive interest rate may mean that the SMSF is not being maintained solely for the purpose of providing superannuation benefits, and/or

      - the trustee breaching section 65(1)(b) SISA, which prohibits the trustee from giving financial assistance to a member of the SMSF or to a relative of such a member using the resources of the SMSF;

    • interest may be capitalised however beofe this is done, please see your financial adviser to ensure what is to be done complies with section 67A1(a) SISA;
17. subject to the Requirements, the SMSF Trustees may at any time after the Effective Date give written notice to the Security Trustees to deal with the Superannuation Asset to the extent that the Acquired Asset becomes a Replacement Asset;
18. the SMSF Trustees may at any time after all instalments, fees and charges (incurred by the Security Trustees pursuant to the Finance Agreement) have been paid in respect to that asset, require the Security Trustee to assign the legal title to the SMSF Trustees. The notice by the SMSF Trustees must be in writing (Transfer Notice);
19. as soon as is reasonably practicable following receipt by the Security Trustees of the Transfer Notice, the Security Trustee will do all such acts, matters and things as are required to transfer the Superannuation Asset to the SMSF Trustees.