ATO ID – SMSFs acquiring an asset with a charge over the asset
The ATO have recently released an interpretative decision (ATO ID 2011/81) around the issue of a SMSF trustee giving a “charge over assets” of the fund and specifically the meaning of “give a charge”.
And we have to say, this is a very interesting one.
Why is it important?
There has generally been a view in the past that a SMSF cannot have an asset in the fund that has a “charge over it”. A “charge” is basically like a mortgage or lien over an asset. Specifically, Reg 13.14 of the SISR states that “the trustee of a fund must not give a charge over, or in relation to, an asset of the fund.”
However, the question has been raised – Does the trustee of a SMSF ‘give a charge’ for the purposes of regulation 13.14 if the trustee purchases an asset subject to a charge that was established before the trustee purchased the asset?
The case
In the case at hand, an SMSF trustee acquires real property from an unrelated party. The trustee knows at the time of purchase that the property is subject to a charge in favor of another unrelated party. After the SMSF trustee acquires the property, it remains subject to the charge
The decision
“No. The trustee of an SMSF does not ‘give a charge’ for the purposes of regulation 13.14 of the SISR if the trustee purchases an asset subject to a charge that was established before the trustee purchased the asset.” – ATO
The key to this decision is in the wording, and specifically around the word “give”.
Reg 13.14 states that a trustee cannot GIVE a charge. As “give” is not defined in the SISA or SISR, the ordinary meaning of the word must be considered.
To cut a long story short here, the ATO go on to explain that there is a clear distinction between this and other Regulations, which specifically deal with recognizing an existing charge.
As such, they conclude that the phrase ‘give a charge’ in regulation 13.14 “requires a trustee, by some positive action, to create a charge and not merely recognise (including act on or give effect to) a previously established charge. “
And of course now you will find there will be people out there (especial those “experts” who like to push the envelope and sail close to wind) coming up with strategies to get assets into their fund that are subject to a charge.
Important note: the ATO have only considered the application of regulation 13.14 of the SISR in the above information. They make a point of saying that you need to also consider compliance with all the other SISA & SISR provisions.
This includes the investment being consistent with the fund’s investment strategy, ensuring it provides no current day benefits to a member or a related party (i.e. the sole purpose test), does not provide financial assistance to a member or relative, and dealings are on arm’s length terms.
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