Treasury has released a draft bill to enact a “look through” approach to apply to limited recourse borrowing arrangements (LRBAs) for income tax and capital gains tax (CGT) purposes, with effect from 1 July 2007. Under a LRBA the asset must be held by the trustee of a separate trust (referred to below as a bare trustee). This has raised a number of issues in relation to how the tax laws interact with the holding of the asset, the super fund and the bare trustee.
If the bill is enacted in its current form, many of these issues will be clarified on the basis that the super fund will:
- Not pay CGT on the transfer of the asset from the bare trustee to the super fund trustee;
- Account for income and expenses at the super fund level (not the bare trustee level);
- Show the asset in its tax return (ie the bare trust does not need to prepare a tax return);
- Account for the cost base and capital gains tax at the super fund level (not at the bare trust level); and
- Account for losses (ie no losses will be trapped in the bare trust).
The draft bill expressly provides that the look through approach does not apply to certain tax file provisions and withholding tax laws. In addition, the bill does not deal with ABNs and GST or stamp duty and land tax. Therefore, at this stage, it is still preferable for the trust, under a LRBA, to be a bare trust.
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