ATO concerns over SMSF investing in Property over stated
The Australian Taxation Office (ATO) recently released a Taxpayer Alert (TA 2012/7) which outlines the ATO’s concerns that some arrangements entered into by an SMSF to acquire property do not comply with the law.
The ATO is concerned that it may not be possible to simply restructure or rectify the arrangements, and unwinding the entire arrangement could lead to a forced sale of the asset, potentially at a substantial loss to the fund.
The ATO is concerned about the potential consequences of poorly structured arrangements regarding direct property investments using limited recourse borrowing arrangement
Under a limited recourse borrowing arrangement (LRBA), the SMSF borrows money to acquire a property which is held via a holding trust (the Bare Trust). The rights of the lender in the event of default of the loan are limited to the asset over which the borrowing is held.
Issues of concern:
- Where the borrowing and the title of the property is held in the individuals’ name and not in the name of the trustee of the holding trust. The SMSF pays part or all of the initial deposit and the ongoing loan repayments.
- The title of the property is held by the SMSF trustee not the trustee of the holding trust.
- Where the trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset is signed.
- The SMSF trustee acquires a residential property from an SMSF member.
- The asset is a vacant block of land. The SMSF trustee intends to use the same borrowing to construct a house on the land. The land is transferred to the holding trust prior to the house being built.
Superannuation issues that could arise from such arrangements
- The arrangement may be in breach of the sole purpose test (SISA section 62).
- The arrangement may be in breach of the borrowing provisions (SISA section 67).
- The asset acquired is not a single acquirable asset (SISA section 67A(2)).
- The asset is subject to a charge in breach of the borrowing provisions (SISA section 67A(1)(f)).
In my opinion all of the above issues can be overcome by Trustees of the SMSF obtaining advice from qualified and experienced SMSF administrators. WFS Canberra Pty Ltd is able to offer such advice as well as set up the Bare Trust and obtain the loan to acquire the property. As long as all the correct legal steps are undertaken, in the correct order SMSF trustees have nothing to be concerned about.