Paying double stamp duty and CGT can be a really difficult trap to identify, because it usually only shows up when an SMSF finishes to pay its SMSF loan. Until then, there’s likely no sign of trouble and the trustees would have no idea that a mistake was made years ago in setting up their SMSF. The problem is, these mistakes can and do happen, and you end up paying double the amount for your SMSF property purchase transactions.
In order to borrow compliantly, a SMSF can only use a limited recourse borrowing arrangement also known as LRBA. In order to meet that requirement, while there is a mortgage on the property being purchased, the title for the said property needs to be held in an entity separate to the SMSF usually referred to as the Bare Trust.
When the SMSF Loan is paid off, the property ownership is then transferred from the Bare Trust to the SMSF. Now typically, a change of ownership is a happy occasion for both the state revenue office and the tax office as it is a trigger for both stamp duty and capital gain tax (CGT). For the SMSF to avoid paying both of these, two things need to have happened at the time of purchase:
- The title must have been stamped with the state revenue office
- The bare trust wording linking it to the SMSF must have been exact and impeccable
The great challenge with this issue is that failing either of the above leaves the buyer completely unaware until it is too late. This is going to be a major issue over the next decade, and it’s likely that a myriad of lawyers and advisers will be exposed, and SMSF trustees will be left to pick up the bill.
I can’t stress enough how crucial it is for SMSF trustees not to cut any corner when it comes to the purchase of their SMSF properties. While the internet is abuzz with free SMSF set up offers, cheap conveyancing and the likes, the cost of an incompetent legal adviser can be tremendous and far outweigh the difference in fees between the experts and the wannabes. Even worse, SMSF Trustees won’t know they’ve been wronged until it is often too late to do anything about it.
A bad surprise could look like this:
- Property purchased for $500,000 in 2010
- Property paid off in 2030 and worth $1,500,000 at the time
- Bare Trust was not written properly and CGT and Stamp Duty apply at the time
- CGT is 10% of $1,000,000 of capital gains or $100,000
- Stamp Duty on a $1,500,000 property currently stands at $82,500 in VIC
- That’s a gran total of $182,500 in additional fees for a reasonably common scenario
When selecting your legal representative for the purchase of your SMSF property, please ensure that they have the right experience and credentials. It will pay off in the long run.
* The information contained in this blog is general information only. No part of this blog is to be construed as a solicitation to buy or sell any security or financial product. The author, in preparing this blog, did not take into account the investment objectives, financial situation and particular needs of any particular person. Before acting on any information or advice in this document, you should consider the appropriateness of it (and any relevant product) having regard to your circumstances. You should also seek independent financial advice prior to acquiring a financial product.