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.

Where are your personal guarantees?

Personal and Director’s Guarantees

In small business run through a trust or a company, it’s common for your various suppliers and credit providers to ask you as the business owner to provide personal guarantees in support of the business’ credit requirements. The nature of these guarantees are usually that they are unlimited and continuing, meaning that you’ll be personally liable for whatever the business may incur in relation to that creditor while that guarantee is effective.

If you’re not keeping track of where you’ve given these personal guarantees, you could be exposing yourself to unknown personal liabilities now and in the future. What happens if you sell the business or are replaced as a director of the company? The guarantee could still bind you regardless if you don’t take steps to have your obligations discharged in some way. Generally, the terms of the guarantee will advise you how this can be achieved, but in practical terms it might mean replacing your guarantee with another form of acceptable security.

Whatever the case may be, make sure you’re keeping track of your personal guarantees otherwise it might be something that will come back to haunt you in years to come.