Common SMSF property investment mistakes

In the four years to June 30, 2012, the self-managed superannuation fund (SMSF) sector grew by 33%, or $109 billion, making it not only the largest slice of the total Australian superannuation pie, but also the fastest growing.

The recent growth in the value of assets held in SMSFs has seen a particular investment area dominate — and that is real estate. Being able to invest retirement savings beyond the stalwart asset classes of shares, fixed interest or cash and into real property has been eagerly taken up by many SMSF trustees.

And ever since the way was opened for trustees to borrow to invest in property, many SMSFs have been entering the real estate market with renewed gusto.

However this in itself has been found to lead to other potential problems — so much so the ATO saw fit to issue a taxpayer alert on the subject. The ATO’s concerns specifically focus on the arrangements being used by SMSFs to invest in direct property. In short, it is worried that the mistakes it has seen being made by SMSF trustees (some of which would admittedly be easy mistakes to make) could end up fast-tracking many SMSFs to the non-compliant sin bin.

Geared property bought in the name of the individual rather than fund

A common error with SMSF property purchases is having the title recorded in the individual person’s name, and not the SMSF. This can come about from the trustee turning up at a property for sale that they are interested in and signing on the dotted line without putting proper thought into the deal. To remain compliant, the property should not be held in an individual’s name. Even where a sale contract has “and/or nominee” to be potentially added later, a lot of the time the paperwork is never rectified.

A property is purchased with two or more titles

The gearing arrangement that is applied for an SMSF buying property only allows for a “single acquirable asset”, so real estate that is already sub-divided or comes with more than one title is off the agenda. Not only that, but real estate for which there is no legal impediment to sub-division or to having portions “assigned or transferred separately” are also in breach of the provisions.

Property is acquired before trustee or holding trust are established

At the time a property contract is signed to acquire a real property asset, the trustee and the holding trust must be in existence. Again, this error can occur simply through bad timing regarding the actual transaction of buying the property. If say a bargain property is leapt upon over a weekend, and the buyer calls us the very next Monday to set up a holding trust and corporate trustee, the rules will have already been breached. The acquiring entity must already exist before a contract to acquire a property asset is signed.

Purchase of residential property from a related party

It’s a straightforward rule, but one that seems to be an ongoing problem. While a property from which a business is run is another matter, if structured in the correct manner, your SMSF just cannot buy residential property from yourself or a related entity.

And not only purchasing, but even leasing out such a property is breaking the rules (so no renting out the SMSF-owned holiday house to relatives, for example).

The real estate in question is an empty block

An easy mistake to make, but as SMSFs are not allowed to use borrowings to improve property investments, a vacant lot of land cannot then have a house built on it under the loan arrangements available to SMSFs. So there is no, for example, borrowing $500,000, buying an empty block for $300,000, and using the rest of the loan amount to construct a building.

While owning a property and making improvements to it are fine for an SMSF that owns the real estate outright, if there is borrowed money involved, the rules change.

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Trustees: July 31 deadline for new beneficiaries to provide TFNs

Closely held and family trust beneficiaries are reminded that they must quote their tax file numbers (TFNs) to trustees before July 31. Otherwise, the trustee is obliged to withhold tax at the top marginal rate, plus Medicare, from any payments distributed to you. A trustee failing to do so can also have penalties applied.

In particular, the trustee must lodge a “TFN report” to the ATO by July 31, disclosing new beneficiaries to whom distributions are to be made to.

An “Annual trustee payment report” containing details of all payments made to beneficiaries for the year is also required. This is done by completing relevant information in the trust tax return.

The ATO uses this information to determine whether taxpayers have correctly disclosed trust income in their own tax returns.

So, if you’re a trustee of a trust which is distributing to new beneficiaries in the 2012-13 income tax year, make sure you contact our office. We can assist you in lodging a TFN report (if necessary) so that you pass on the relevant TFNs to the ATO.

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