We are well aware that our recent posts about the risks of property investment via self-managed superannuation funds (SMSF) may seem a little humbug, but we remind you that it is our job to stop you from making bad investment moves.
That’s what we are here for and we don’t apologise for it.
A new SMSF ruling has been released by the Australian Taxation Office (ATO) recently with the purpose to educate people with regard to common issues the ATO has witnessed here.
There are many ways people are misusing or misconstruing the SMSF borrowing legislation and we intend to discuss the more common issues below.
1. Loan Contract & Property Title in the SMSF Members Personal Names
This is common where SMSF members jump the gun and purchase the property prior to the SMSF establishment or people do not have adequately qualified solicitors read their property documentation thoroughly.
This could be seen as the SMSF providing financial assistance to the SMSF members by funding the loan. This could also be seen as the SMSF providing lump sum superannuation payments to fund members without satisfying a condition of release.
This results in a breach of the “sole purpose test” under superannuation law and carries hefty penalties.
2. Property Title in the Name of the SMSF
SMSF borrowing arrangements are complex and special. Superannuation law prohibits funds from possessing loans, hence SMSF borrowing arrangements require the property acquired under the loan to be held on trust by a “security trustee” for the duration of the loan term.
Subsequently, one of the primary criterions is that the property title be in the name of the security trustee NOT the name of the SMSF.
This could result in the SMSF breaching superannuation law and require a forced sale of the property at potentially a substantial monetary loss to the fund.
3. The Purchase of Residential Property from a Fund Member
SMSFs cannot acquire assets from fund members or other related parties to the fund. Related parties include family members, business partners and associated entities. It may sound good to purchase a property from yourselves and put it into the SMSF to take advantage of the tax concessions, but it is flat out illegal.
This breaches the in-house asset test rules of the superannuation law and carries hefty penalties. Again, this could see the fund forced to sell the property at a loss.
4. The Purchase of Land and Subsequent Construction of a Property
If the SMSF decides to purchase a block of land under a borrowing arrangement and then decides to use borrowed monies to construct a residential property on the acquired land, it will be in breach of the borrowing rules. This is seen as “improving” the property and changing the characteristics of the property whilst using borrowing funds.
The asset held on trust is land and by constructing a property on the land you are changing the asset to a residential property.
A breach of this rule can also see a forced sale with a loss to the fund.
5. The Purchase of Two Adjacent Blocks of Land
The SMSF finds two blocks of land that a vendor is only willing to sell together. The fund enters into a borrowing arrangement to purchase the two blocks.
The SMSF has breached the borrowing rules as, although the vendor will only sell them together, the two blocks are separate assets and only a “single acquirable asset” can be purchased under a borrowing arrangement.
If the SMSF wanted to they could establish two borrowing arrangements and purchase each of the blocks of land under separate borrowing arrangements, however the SMSF would need to be in an appropriate position to do this and be aware of the costs to do this.
The law here is complex and you should not be misled that this SMSF borrowing arrangements are appropriate for everyone. Contact us to discuss your circumstances.