Most people who manage their own superannuation funds are aware that through the use of an ‘installment warrant’ arrangement, it is possible to borrow money within a Self Managed Superannuation Fund (SMSF). The process involves setting up an Installment Trust (A Bare Trust) with a Custodian trustee. Properly structured it means that the fund is compliant and whe the debt is repaid the asset transfers to ownership by the SMSF without any Capital Gains Tax (CGT) implications.

Lawyer Brett Davies from Perth reports that there are some problems arising from documentation prepared by the banks who are promoting their Installment Warrant loans.

Brett says:

To create an effective CGT position, the trustee of the SMSF must be absolutely and presently entitled to the asset from the start of the bare trust. The custodian has really no discretionary powers and simply follows the directions of the beneficial owner. This is the very nature of a bare trust. Anything different and it is not a bare trust and fails. The beneficial owner is the superannuation fund. On this basis, no CGT event arises when the loan is repaid or when the property is transferred to the superannuation fund.

The trust needs to be a Bare Trust as this avoids CGT. It seems that in many cases the banks are putting in their own trustee (and charging a fee for the privilege) who has broad powers to deal with the trust asset (the incumbent property). This has the potential to create a CGT liability when the asset is transferred to the superannuation fund.

There is a clear lesson here. Don’t let the bank provide the documentation. Get independent advice and use a trustee that you control (it’s cheaper also) whose is obliged to transfer the property to the superannuation fund on repayment of the debt.

POSTED: 04-Mar-2010

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