The ATO has warned trustees of SMSFs to be cautious when investing in property.
Acting commissioner Bruce Quigley says he is concerned people are using their SMSF to invest in property without fully understanding their obligations under the law – or that some are seeking to take advantage of certain types of arrangements.
Quigley acknowledged that investing in property can be a confusing area for some people.
“We have observed that some arrangements are deliberately entered into to get around the law, which can result in the fund’s trustees being disqualified, facing civil penalties or even facing criminal charges. Those marketing properties to SMSF trustees as part of such arrangements could be referred to ASIC,” he said.
The finer details are important, and trustees must ensure that property is the right investment for their SMSF – and that the arrangement is legal.
“We have also seen instances where holding trusts have not even been established at the time the contracts to acquire are signed. In other instances, the title of the property is held in the individual’s name rather than the trustee of the holding trust. Another common mistake is gearing in a related unit trust, which is not allowed under the law,” said Quigley.
He said some of these arrangements, if structured incorrectly, can’t simply be fixed.
“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.”
“I urge trustees to get reliable, independent advice when making investment decisions and to obtain advice from us if they are contemplating entering into these sorts of arrangements. The responsibility for ensuring their SMSF complies with the law rests with them.”
Commenting on SMSF borrowing strategies, SMSF Professionals’ Association of Australia (SPAA) technical director Peter Burgess noted that it's vital for clients to be well educated.
“Used in the right circumstances and structured correctly, there can be considerable benefits associated with these borrowing strategies. But SPAA is concerned that some people are seeing this type of borrowing as a way into a property investment without realising the potential downside," he said.
SPAA has created a fact sheet, designed to be issued by SMSF practitioners to alert and educate their clients. Highlighted risks include:
Only assets that the SMSF trustee is not otherwise prohibited from acquiring can be bought under a limited recourse borrowing arrangement. Although there are exceptions, this generally means that assets a trustee or a related party own cannot be bought under this arrangement.
Assets acquired under this arrangement cannot generally be replaced with a different asset. In practice, this means alterations to a property cannot be made if it fundamentally changes the character of the asset.
There may be additional costs associated with acquiring an asset under this arrangement.
Loan repayments are deducted from a fund, meaning it must always have sufficient liquidity to meet repayments.
The ATO has become aware that certain limited recourse borrowing arrangements have not been structured correctly. In these cases it’s not simply a matter of restructuring the arrangement. Rather, it has to be unwound, often at a substantial loss.
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