ATO urges caution with SMSF property investments

The ATO has warned trustees of self-managed superannuation funds (SMSFs) to be cautious when investing in property.

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 ATO is primarily concerned with arrangements where:

  • an SMSF invests in a related unit trust by acquiring units in the trust, and the unit trust acquires property, but the arrangement breaches the superannuation compliance rules in some way, such as where the property is subjected to a mortgage, or is acquired from or rented to a related party, when it would otherwise be prohibited; and
  •  an SMSF enters into a Limited Recourse Borrowing Arrangement (LRBA) to acquire an asset, and the arrangement does not comply with the strict conditions that must be met for SMSFs that borrow.

In particular, these borrowings must generally be used to acquire a single asset (that the fund is not otherwise prohibited from acquiring; e.g., SMSFs are prohibited from acquiring residential property from a related party), and the asset acquired cannot be held directly by the SMSF but must be held by a separate ‘holding trustee’ (or ‘custodian’), solely for the benefit of the SMSF.

The ATO has also stated that:

  • the trustee of the holding trust must be in existence, and the holding trust must be established, by the time the contract to acquire the asset is signed; and
  • the SMSF cannot borrow to acquire a vacant block of land and then use the same borrowing to construct a house on the land.

According to the ATO:

“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.”

SMSFs that do not comply with the superannuation laws may also become ‘non-complying’ for tax purposes and, if the SMSF or the unit trust needs to dispose of the relevant property, they may incur a CGT liability, or the SMSF (and any other unitholders) may be required to include a capital gain in their assessable income if they need to redeem their units in the unit trust.

In addition, the ATO states that where arrangements are deliberately entered into to get around the law, the fund’s trustees may be disqualified, face civil penalties or even face criminal charges.

What kind of expenses am I expected to incur when entering into a Retail Lease?

We get this question a lot and it’s a tough one to answer! Not because we can’t – it’s just difficult to answer such a general question. There is no hard and fast answer to this question as it will depend on a large number of factors. In addition to rent, there are all sorts of costs that you would have to incur when you enter into a Retail Lease. These are both ongoing or one-off. Generally however you would incur the following outgoings:

  • Rent
  • Water Rates
  • Local Council Rates
  • Land Tax
  • Electricity Rates
  • Local Council Parking Levies (if premises offer council parking)
  • Local Council Outdoor Seating License (if premises have outdoor seating)
  • Public Liability Insurance
  • Glass Replacement Insurance
  • Building Administrative and Maintenance Fees(if premises is part of strata)
  • Marketing Fees (if premises is part of a larger shopping complex)

Outgoings will change depending on:

  • Floor space
  • Location
  • Value of the premises
  • Equipment on the premises
  • What you are doing

The above is a non-exhaustive list of matters. As stated there is no hard and fast answer to “what is expected” and “how much” it is expected to cost as these matters will change depending on where you want to lease. This is a matter for homework and you’ll likely get these answers once you’ve properly investigated the location of where you want to lease. But this isn’t a chicken and egg dilemma – in NSW the Retail Leases Act says that the landlord of retail premises must issue a “disclosure statement” to all potential lessees that sets out what these costs are before the lessee enters into the lease agreement.

Retail Leases can be complex – if you are entering into one, give us a call and we’ll guide you through the process and assist you with your transaction.