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.

Small Business and the Privacy Act

The Privacy Act 1988 (Cth) is a piece of Australian law that determines how personal information should be collected and used. If you are a business, you might end up collecting personal information about your clients. If that is the case then you might be required to comply with the Privacy Act. Even if you are not required to comply with the Privacy Act, it’s still a good idea to consider whether you should put business processes in place to ensure compliance with the Privacy Act.

Generally speaking, personal information is information or an opinion about an individual, who may be identified from the information. That’s a broad definition!

The Privacy Act establishes a set of National Privacy Principles. These set out, for example:

  • How personal information is collected
  • How personal information is used or disclosed
  • What steps are being taken to ensure that the information is accurate and up to date
  • How the personal information is managed
  • How clients can access and update the personal information

If you are a small business who has an annual turnover of less than $3 million, you do not need to comply with the Privacy Act, unless you are:

  • A health provider
  • Trading in personal information
  • Related to a larger business
  • Contracting for the Australian Federal Government
  • An operator of a residential tenancy database
  • Obliged to report matters under the Anti-Money Laundering Act

Even though you are a small business that the Privacy Act does not apply to, it still might be a good idea to put into place business processes to comply with the Privacy Act. After all, clients may be reassured that you are doing something to ensure their privacy, even where you are not required to.

If you need to comply with the Privacy Act or would like to voluntarily comply with the Privacy Act – give us a call, and we can help you sort things out.