SMSFs Investing In Property – Be Warned

By Darren Kingdon

The Australian Taxation Office has recently warned that SMSF trustees and advisers need to exercise care when investing in real property, with a number of arrangements identified as not complying with the superannuation law.

It is important to ensure any arrangements entered into by an SMSF to invest in property are properly implemented, particularly those involving the use of limited recourse borrowing arrangements or related unit trusts.In many instances, these arrangements cannot simply be restructured or rectified and unwinding the arrangement may result in the forced sale of assets which could cause a substantial loss to the SMSF. This is on top of heavy ATO penalties and transaction costs. In a Taxpayer Alert TA 2012/7, the ATO has identified a number of problems with property purchases using limited recourse borrowing arrangements, such as:

  • Confusion over borrower identity – this must be in the name of the SMSF trustee, rather than the holding trust trustee or related party
  • Title in wrong name – the legal title to the property must be in the name of the holding trust trustee, not the SMSF trustee
  • Inadequate loan documentation – proper documentation is required to evidence the loan supported by a regular pattern of repayments
  • Timing of entity establishment – the trustee of the holding trust does not exist or the holding trust not established at the time of entering into the contract
  • Residential properties – these generally cannot be acquired from related parties, except in very limited circumstances
  • Payment of deposit – problems can be exacerbated further if the deposit is paid by the SMSF where the arrangement was defective
  • Acquisition of two or more separate titles – only single assets can be acquired unless there is a physical or legal reason for treating the assets as a single asset
  • Re-borrowing to develop vacant land – using additional borrowings to develop land is also prohibited by the superannuation law

As highlighted by the ATO, there is a lot of talk about the benefits of super borrowing arrangements, but not a lot about the associated risks.

Due to the complexity of many investments involving real property, it is strongly recommended that you seek specific financial advice to manage these risks.


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