The ATO has warned trustees of self-managed superannuation funds (SMSFs) to be cautious when investing in property.
The ATO is concerned that people are using their SMSFs to invest in property without fully understanding their obligations under the law, or that some people are seeking to take advantage of certain types of arrangements.
The ATO is primarily concerned with arrangements where:
- an SMSF invests in a related unit trust by acquiring units in the trust, and the unit trust acquires property, but the arrangement breaches the superannuation compliance rules in some way, such as where the property is subjected to a mortgage, or is acquired from or rented to a related party, when it would otherwise be prohibited; and
- an SMSF enters into a Limited Recourse Borrowing Arrangement (LRBA) to acquire an asset, and the arrangement does not comply with the strict conditions that must be met for SMSFs that borrow.
In particular, these borrowings must generally be used to acquire a single asset (that the fund is not otherwise prohibited from acquiring; e.g., SMSFs are prohibited from acquiring residential property from a related party), and the asset acquired cannot be held directly by the SMSF but must be held by a separate ‘holding trustee’ (or ‘custodian’), solely for the benefit of the SMSF.
The ATO has also stated that:
- the trustee of the holding trust must be in existence, and the holding trust must be established, by the time the contract to acquire the asset is signed; and
- the SMSF cannot borrow to acquire a vacant block of land and then use the same borrowing to construct a house on the land.
According to the ATO: “The fine details are important and trustees need to be sure that property is the right investment for their SMSF and that the arrangement is legal.”
“Some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified. The only option may be to unwind the arrangement which could involve forced sale of assets at an inconvenient time. This could be very expensive for the fund with potential stamp duty and tax consequences.”
SMSFs that do not comply with the superannuation laws
may also become ‘non-complying’ for tax purposes and, if the SMSF or the unit trust needs to dispose of the relevant property, they may incur a CGT liability, or
the SMSF (and any other unitholders) may be required to include a capital gain in their assessable income if they need to redeem their units in the unit trust.
In addition, the ATO states that where arrangements are deliberately entered into to get around the law, the fund’s trustees may be disqualified, face civil penalties or even face criminal charges
For more information
For more information regarding this article or its contents, please contact Alex Mineeff from Taxable Accounting on 02 8883 4016.
Alex Mineeff formed Taxable Accounting, to provide professional accounting, taxation, auditing services to individuals and small businesses. Alex is a Certified Practising Accountant (CPA), registered auditor, and is a member of a number of professional bodies, including Australian Society of CPA's, National Taxation & Accountants Association, and the Taxpayers Association. Alex is also an active member of both the Rotary Club of Norwest Sunrise and the Hills Chamber of Commerce.
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