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.

Cybersquatting!

We were recently asked to address a question involving cybersquatting. Cybersquatting is a controversial practice where an individual or a business registers an internet domain name (the website address) that someone else may have an interest in. The “cybersquatter” then often refuses to do anything… until they have been paid, of course.

This sort of behaviour often arises from the “first come first serve” nature of the domain name registration system, as well as the relative ease and low cost of registering a domain name. Cybersquatters often register a large number of domain names that other people may have an interest in, and then auction them off or sell them for a higher price than the price of the registration.

Over the last decade or so there have been a number of high profile cases where this sort of behaviour took place. In the 2000s, websites such as “madonna.com” and “singaporeairlines.com” were occupied by alleged cybersquatters. In 2004, the rapper Eminem won a case against a cybersquatter. There were disputes over “juliaroberts.com” and “jimihendrix.com”.

This practice still continues. As a small business, you might have encountered such practices in the past, or you may be a target of cybersquatters. If something like this does happen to you, you can take some action through the WIPO’s Uniform Domain Name Resolution Policy or, if the domain name ends with “.au”, the .au Dispute Resolution Policy.

An example of a complaint would be one where you have registered a business or a trade mark within Australia, and the “cybersquatter” registered the domain name, in bad faith, some time after you registered your business or your trade mark, and has no intention of using it in any way.

The UDRP or the .auDRP have some remedies, such as cancelling or transferring the domain name registration. Unfortunately the process requires putting together sufficient evidence to support your case, does take some time, and may not be cost effective – you also are unlikely to recover legal costs spent to pursue this.

In the alternative, complainants may lodge a complaint saying that the person who registered the domain name is not eligible to register that name – however this would likely result only in the revocation or cancellation of the registration.

Because the internet is such an important aspect of small business these days, it is very important to plan ahead for these things. Before starting up, you should check out if the domain name related to your brand or your company is taken. Even if you have no intention of putting up a website immediately, you should take steps to preemptively block out or register domain names related to you or your business. For a small cost, this will likely save you the hassle of going through the lengthy dispute resolution process that you would have to go through if you didn’t do these from the beginning.