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Tax Tip 49: Transfer of Title from Bare Trustee to Beneficiary and Tax Issues

Discussion in 'Accounting & Tax' started by Terry_w, 7th Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Transfer of Title from Bare Trustee to Beneficiary and Tax Issues

    A bare trust is a trust where someone holds property for someone else absolutely. see Legal Tip

    Since the the beneficiary is really the beneficial owner of the property the transfer of title is not a CGT event

    s106-50 ITAA97
    http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s106.50.html

    Each State also has stamp duty concessions. In NSW s57 of Duties Act charges $50 for the transfer from a trustee to a beneficiary http://www.austlii.edu.au/au/legis/nsw/consol_act/da199793/s57.html

    To find out what a bare trust is see
    Legal Tip 83: What is a Bare Trust? https://propertychat.com.au/community/threads/legal-tip-83-what-is-a-bare-trust.4545/
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Well that depends if the beneficiary is absolutely entitled. An area of complexity where poor legal drafting can bite the beneficial owner years later. This issue came up with SMSF limited recourse loans and many early "bare trusts" contained clauses which major bank lawyers required which were a bit deficient based on decisions of court ie Kafitaris.

    eg Clauses where the SMSF could choose to call for the property etc rather than having an absolute right to call. These may not satisfy the CGT exemption for event E1 found in s104-55(5)(a)...Kafitaris'had a deed drafted in 1987 and ended in court over 20 years later (not in their favour) as neither member could call for the asset as a beneficiary.

    Treasury identified together with ATO that tax law and common law were not consistent and a SIS issue was identified but that doesn't cover all bare trusts. OSRs around the country have taken various approaches and much of that is very unclear. Often the only solution is seeking a Ruling from OSR that the Bare Trust does comply. For example adding a member to a SMSF after a LRBF can taint the exemption in NSW unless the new member is prevented from accessing benefits to the (bare trust) property as a SMSF asset !! This can require complex sub-trusts and / or specific exclusions to benefits contained in the trust deed. Rare but important - With the popularity of SMSFs it can be a land mine - Hidden from sight but dangerous for decades.

    Bare trusts are one for the lawyers but important as nobody wants the final transfer to become dutiable and/or subject to CGT for any bare trust.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I believe the SMSF LBR trusts are not bare trusts, although they have often be called this. Custodian trusts is a better term perhaps. They are not bare trusts because they generally allow for the trustee to refuse to transfer title until certain conditions are met.

    but there are separate stamp duty exemptions for transfer of title from a custodian SMSF trustee to a SMSF trustee.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Legal Tip 83: What is a Bare Trust? Legal Tip 83: What is a Bare Trust?
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    A bare trust generally should be recognised by OSR at the time of acquisition to be valid later. They generally stamp the deed and it is good practice to seek a private ruling from the OSR

    It can be done later but does raise some concerns and the evidence required is more than a deed in some instances. Some bare trusts aren't explicit (in writing). Terry raises a VERY pertinent point that if a member is added after a LRB OSR will seek evidence the new member does not benefit from that asset. All it takes is a accountant or a low cost admin service who arent aware of this risk and bingo its a duty problem. The LRB asset must always be held on trust for the original members. I did question OSR NSW on their approach if one of the founding members dies etc and they declined to address it at the time.