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ยป Acquiring property through your SMSF
Date published: 07/08/2011
Acquiring property through your SMSF - Part I
There is still some confusion about what property a self managed super fund (SMSF) can invest in and which are no-go areas. This article provides some clarity on the rules about SMSFs investing in property.
Basically, there are two distinct rules when it comes to SMSF trustees acquiring property from individuals, couples, companies or trusts; one is relevant to investing in residential property and the other is relevant to investing in business or commercial property.
WHAT SMSFs CANNOT INVEST IN
RULE 1: SMSFs are prohibited from buying residential property from fund members or from people, companies or trusts they are ‘associated’ with. Purchases must be made at arm’s length. While who constitutes an ‘associate’ is generally pretty obvious, sometimes it is more difficult to determine.
A simple test to determine association is as follows:
• Two people would be deemed associated if they are related (e.g. family members such as brothers and sisters), or if they are involved in a business venture together (in a partnership or on an employer/ employee basis).
• A person and a company would be associated if the person is a director of the company and is actively involved in the day-to-day operations of the company or if the person owns over 50 per cent of the shares or has voting rights for the company.
• A person and a trust would be associated if the person is a beneficiary of the trust and the trust is a discretionary trust (such as a family trust) or if the person owns over 50 per cent of the units or has voting rights for a unit trust.
Where there are doubts about association, ask your accountant, solicitor or superannuation adviser to confirm if your property acquisition is acceptable under superannuation legislation.
Several years ago I was asked by an accountant in a Victorian regional town to advise on a case involving a husband and wife who had acquired property outside their SMSF in their own names. The property was to be used as the new family home. However, instead of selling their existing home, the couple arranged for it to be transferred to their fund as an in specie (or non cash) contribution. The solicitor handling the transfer had not queried the legality of the transfer under super legislation nor had the couple (who were trustees of their fund) asked him if the transfer was allowed.
What was clear was that all parties involved were unaware that an in specie transfer constituted an actual purchase, although no money had effectively changed hands. In essence, residential property cannot be transferred from an ‘associate’ (the fund members) to their fund.
The couple had no option but to sell the property. They could have pooled resources and purchased the property themselves but due to other commitments they were unable to raise the necessary finance.
Another option could have been to transfer the property to the members as a lump sum benefit, but neither qualified to receive a lump sum at that time. They were not yet 65 and were still gainfully employed in their own business. The fund’s auditor was required to issue a qualified audit report and forward a contravention notice to the regulator, the ATO.
WHAT SMSFs CAN ACQUIRE
RULE 2: SMSFs can buy business real property from anyone, including fund members or people, companies or trusts they are ‘associated’ with. They can also buy residential property owned by someone else who is not an associate.
Business real property: To pass the business real property test and be classified as such, the property must be used wholly and solely for business purposes at the time of purchase. It can be a shop, factory, office or farmland. It can even be a house used for business purposes, such as a doctor’s surgery or an accountant’s office.
Simple? Well it can be more complicated. Let’s take a look at an example of where the same piece of property does and doesn’t pass the test.
Before transferring a shop, office, factory or farmland which you own personally but are not using for business purposes into your SMSF, make sure you have a tenant running a business from that property or you will fail the business real property test.
Also when transferring business real property to your fund, it must be bought at an arm’s length price. Under current legislation, a market appraisal from a registered real estate agent would be sufficient to determine the purchase price.
You can purchase business real property from someone previously unknown and once done, lease the property to a business you own.
If you are uncertain ask your accountant or superannuation adviser because, apart from the potential legal problems, it could prove costly to rectify.
This article was Part I. The next article in this series will include discussion of some examples...
Ms Lesley A Williams
Director - Major Street Publishing
This article is a chapter excerpt from: How to Invest in Property Through your Self Managed Super Fund by Martin Murden. Published by Major Street.
Now that you have read this, what do you think? Do you have other ideas? Please share you views with other members (eg by blog or on the discussion forum) and/or request professional member(s) to contact you directly.
