In this episode we cover some practical LRBA timing questions.
LRBA Timing
Even when you understand LRBAs in theory – and that is complex enough – there are still a lot of practical questions to answer, especially around timing. What exactly has to happen when?
To do a quick recap: So far we have done four episodes about LRBAs. In Ep 183 we discuss LRBA basics. In ep 187 and 188 we cover the joint purchase of property through an SMSF together with a related party and of course the role LRBAs often play in that. And then in ep 223 we discuss the LRBA Safe Harbour Rules.
In this episode Geoff Stein of Brown Wright Stein Lawyers in Sydney talks about LRBA timing. In theory it all sounds easy, but what exactly do you do when.
Here is what we learned but please listen in since Geoff explains this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
LRBA Timing
Timing is especially critical around the declaration of trust and the purchase of the property.
1 – When do you set up the bare trust deed?
You can set up the bare trust deed well before the purchase. The problem is that the bare trust doesn’t come into existence until you have trust property.
For a trust to exist you need a trustee, trust property, beneficiaries and a deed that governs the relationship between these three. So as long as you don’t have trust property, you don’t have a trust.
2 – When do you set up the trust?
When you set up the trust after the purchase, you run the risk that there is no trust at the time of purchase due to lack of trust property. So you might get stuck with stamp duty on the actual acquisition and then again on a separate declaration of trust.
The solution is a custodian agreement beforehand. Creating the trust after purchase is not a problem as long as you have a written and signed custodian arrangement in place beforehand.
The custodian appointment is simply saying to the trustee of the fund, “I appoint you as custodian to be the agent for the trustee of the fund to acquire property on behalf of the fund”. You can but don’t have to name the property in that.
3 – Can you add the property address after purchase?
You can add the property address after purchase as long as it is a custodian appointment arrangement.
However, if you add the address after purchase to a bare trust deed, then there is an issue. By adding the address later, you basically do a new declaration of trust.
And dutiable property that is subject to the declaration of a trust is subject to stamp duty in its own right. So you can get caught in a trap where you are paying stamp duty on the conveyance and stamp duty on the declaration of trust. So again a double stamp duty issue.
4 – Which documents are to identify the property when?
A custodian appointment deed may or may not identify the property but if you decide not to identify the property, then you should do a follow up bare trust deed after the completion which does identify the property.
A bare trust deed must identify the property.
Mortgage and loan agreements must identify the property as well, but make sure that the recourse is limited to that particular asset.
5 – What do the banks want to see when?
Each bank is different. And banks change their requirements over time. So it is difficult to make a general statement about this.
The big banks have set procedures that makes it slighly more predictable but even then instructions from the bank’s inhouse legal team will change over time. And then there is also always a certain degree of discretion among the bank staff reviewing your LRBA set up.
6 – Is timing the most common point of contention?
The most common point of contention is actually not timing, but the right of indemnity that the bare trustee has against the assets of the bare trust as well as the SMSF.
So what assets can the bank go for if the loan is not paid back.
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