The ATO has warned trustees of self-managed superannuation funds (SMSFs) to be cautious when investing in property, by issuing Taxpayer Alert TA2012/7.
The ATO is concerned that people are using their SMSFs to invest in property without fully understanding their obligations under the law, or that some people are seeking to take advantage of certain types of arrangements.
"The fine details are important and trustees need to be sure that property is the right investment for their SMSF and that the arrangement is legal."
"Some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified. 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."
In addition, the ATO states that where arrangements are deliberately entered into to get around the law, this can result in the fund’s trustees being disqualified, facing civil penalties or even facing criminal charges.
What arrangements are the ATO concerned about?
The Taxpayer Alert applies to arrangements with features substantially equivalent to the following:
Arrangement 1 – Property investments using Limited Recourse Borrowing Arrangements (LRBAs)
The ATO is concerned where an SMSF enters into a LRBA to acquire an asset, and the arrangement has at least one of the following features:
Note: The last two features are of particular concern where the LRBA was entered into post 7 July 2010. The ATO considers that arrangements of this type give rise to the following issues, being whether:
In addition, the member(s) may be required to include the SMSF loan repayments in their assessable income under Div.304 of the ITAA 1997, and the income (and its associated deductions) from the investment should be declared by the individual member(s) rather than by the SMSF where the investment is not held for the beneficial interest of the SMSF.
Arrangement 2 – Property investments using related unit trust
An individual or individuals (‘the fund members’) establish an SMSF and rollover their existing superannuation benefits into the SMSF, or are members of an existing SMSF.
A unit trust (‘the unit trust’) is established for the purpose of acquiring a property (or alternatively an existing unit trust is to be used), which is a ‘related unit trust’.
The fund members subscribe for units in the unit trust, possibly borrowing money from a commercial lender to fund the subscription, and the SMSF also subscribes for units.
The trustee of the unit trust purchases an asset (‘the asset’), such as a property which is rented out.
The arrangement has one or more of the following characteristics:
The ATO considers that arrangements of this type give rise to the following issues, being whether:
As a result of non-compliance with the SIS Act, the SMSF may become a non-complying superannuation fund for tax purposes and, if the unit trust needs to dispose of the relevant property, the unit trust may incur a CGT liability, or the members and the SMSF may be required to include a capital gain in their assessable
income if they need to redeem their units in the unit trust.
Ref: ATO Media release 2012/51, 20 November 2012 and TA2012/7