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A common concern about limited recourse borrowing arrangements under section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) for a self managed superannuation fund (SMSF) is whether double stamp duty will apply. In some states, the law eliminates that risk. However, in Queensland there is currently no specific exemption at law and therefore a real double duty risk remains.


Limited recourse borrowing: 2 transactions

An SMSF trustee can borrow money in only limited circumstances – including investing in an asset provided that the borrowing meets the various requirements of section 67A of the SIS Act. These requirements – as explained below – can give rise to a risk that stamp duty on property purchased with borrowed funds may be payable twice, known as “double duty”.

The 2 requirements in section 67A that give rise to the double duty risk are summarised as follows:

  • The acquirable asset must be held on trust for the SMSF trustee(s) until the loan is repaid. To enable this, the asset is purchased by a third party (often an SMSF member or related company) and held on trust for the SMSF trustee. Duty is payable on that transaction. The law is in section 67A(1)(b) which provides that the acquirable asset purchased with the borrowed funds must be held on trust so that the SMSF trustee acquires beneficial interest in the acquirable asset;
  • The SMSF trustee must have a right to acquire legal title of the asset once the loan is repaid. That transfer to the SMSF trustee can also be dutiable. The law is in section 67A(1)(c) which provides that the SMSF trustee must have a right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest.

Generally, in a limited recourse borrowing arrangement an SMSF trustee will execute a trust deed appointing another person/entity (this person/entity is referred to usually as a Bare Trustee or a Custodian – we shall use Custodian in this article to avoid confusion with the SMSF trustee) to hold the property on trust until the SMSF trustee has paid one or more repayments on the loan.


The stamp duty liability on an SMSF’s limited recourse borrowing

As a result of these requirements, when a SMSF trustee purchases an acquirable asset using borrowed funds there will likely be two transfers that could attract stamp duty:

  • Firstly, a transfer of the acquirable property from its original owner to the Custodian (Primary Transfer); and
  • Secondly, a transfer from the Custodian to the SMSF after the trustee has made one or more repayments of the loan taken out to purchase the asset (Ultimate Transfer).

Stamp duty will always be payable in respect of a Primary Transfer. Stamp duty may also be payable as a result of the Ultimate Transfer.

In some jurisdictions (for example in Victoria), stamp duty will not apply to the Ultimate Transfer because of an exemption in the State’s duty laws (SMSF trustees will need to obtain their own stamp duty advice to confirm if an exemption applies in their jurisdictions). Typically, the exemption provides that a transfer of dutiable property by a trustee to a beneficiary will be exempt from stamp duty provided that there is no change in beneficial ownership.


The law in Queensland

The Duties Act 2001 (Qld) (Duties Act) does not contain a specific exemption from stamp duty in respect of the Ultimate Transfer noted above.

There are two possible approaches to overcoming the double duty risk.


Approach one: principal and agent

Some lawyers have suggested that by adding a clause to the trust deed that appoints the Custodian (Custody Deed), an exemption in the Duties Act could apply to the Ultimate Transfer. There are some concerns about this approach.

The relevant exemption is set out in section 22(3) and reads as follows:


(3) If the commissioner is satisfied –

a. a person (the agent) is appointed in writing as agent for another person (the principal); and

b. under the appointment, the agent enters into a dutiable transaction that is an agreement for the transfer of dutiable property from a person (the original transferor) to the agent on behalf of the principal (the agreement); and

c.         the principal provided all the consideration, including the deposit paid; and

d.         transfer duty imposed on the agreement is paid; and

e.         the dutiable property is later transferred to the principal by the original transferor or the agent (the agency transfer);

         no transfer duty is imposed on the agency transfer or the agency transfer or the trust acquisition or trust surrender by the principal because of the agency transfer.


(4)        For subsection (3)(a), the commissioner must not be satisfied the person was properly appointed as an agent unless the original instrument of appointment, or a copy of it, is lodged.

As a result of this section, it has been suggested that a Custody Deed for the purchase of land in Queensland, should include a clause that provides that the Custodian is purchasing the property as agent for the SMSF.


Our concerns

Our concern with this approach is that an agency clause may not achieve what is intended. The purpose of an agency clause is to satisfy the Queensland Commissioner for State Revenue (Commissioner) that the arrangement between the SMSF trustee and the Custodian under the Custody Deed meets the requirements of section 22(3). That is, that the SMSF trustee has appointed the Custodian to purchase dutiable property as the SMSF trustee’s agent.

However, the Commissioner will not be satisfied merely by words in the Custody Deed alone. In Public Ruling DA22.1.1 (Ruling), which concerns section 22(3) of the Duties Act, the Commissioner states:

“When determining whether s.22(3) of the Duties Act has application, the Commissioner is required to consider all of the relevant facts of each case.”

Important among the relevant facts will be, regardless of whether or not a Custodian Deed contains an agency clause:

  • Under the Original Transfer, the Custodian purchased the dutiable property as trustee for the SMSF trustee – this is essential to satisfy the requirement of section 67A(b) of the SIS Act; and
  • Under the Ultimate Transfer, the Custodian purchased the dutiable property as trustee for the SMSF trustee – this is essential to satisfy the requirement of section 67A(b) of the SIS Act; and
  • Under the Ultimate Transfer the Custodian transfers the dutiable property to the SMSF trustee in its capacity as trustee under the Custody Deed, not as agent.

The really question is...can a person/entity be a trustee and an agent at the same time? The Queensland Office of State Revenue may very well deem that the exemption in section 22(3) may not apply, regardless of whether a Custody Deed included a reference to agency.

Also, from a practical viewpoint, it is important to remember that the Custodian and the relevant holding trust must be established first. The agency agreement can then be entered, setting out the property details. This is despite the fact the contract for the property has not yet been signed, let alone accepted by the Seller. Naturally, this can lead to unnecessary expenses in the event the Seller does not accept the contract offer and the matter does not proceed.


Approach 2: leave the asset in the custodian’s hands – so there is never the “ultimate transfer”

The simplest way to ensure that there is no duty liability arising from an Ultimate Transfer is to avoid it altogether – that is, don’t transfer the dutiable property from the Custodian to the SMSF. Instead, the Custodian can retain the dutiable property until it is time to sell it. Once the property is sold, the Custodian can pay the proceeds of the sale to the SMSF in cash. This transfer will not be subject to duty.

Unfortunately, this solution itself is not without its problems. The ATO has recently indicated its view that an SMSF trustee’s interest in a trust established for the purposes of section 67A(1) of the SIS Act will be an in-house asset if the Custodian continues to hold the relevant asset after the loan has been repaid.

Please note that this a general summary of complex revenue law provisions for which specific advice should be obtained based on your individual circumstances and this should not be used as a substitute for such formal advice. For further advice specific to your situation, please contact Olsen Lawyers on (07) 3846 5288.

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