ATO has recently issued Taxypayer Alert TA 2012/7 that describes certain arrangements entered into by self-managed super funds (SMSFs) to acquire property which do not comply with super law.
SMSF trustees and advisers need to exercise care when investing in property. It is important to ensure any arrangements entered into by an SMSF to invest in property are properly implemented, particularly those involving limited recourse borrowing arrangements (LRBA) or the use of a related unit trust.
Property investments using LRBA
Subject to limited exceptions, trustees of SMSFs are prohibited from borrowing money. An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies the conditions contained in the superannuation laws. Different conditions apply for arrangements entered between 25 September 2007 and 6 July 2010 inclusive and arrangements entered into on or after 7 July 2010. Some of the requirements of this exception are that the investment is made through a holding trust and not held directly by the SMSF trustee; and the investment is in a single acquirable asset. These arrangements are commonly referred to as LRBA.
Property investments using related unit trust
Subject to limited exceptions, the trustee or investment manager of an SMSF is prohibited from intentionally acquiring assets from a related party. One exception is where the asset is an investment in or loan to a related party, commonly referred to as an ‘in-house asset’. However the total market value of the SMSF’s in-house assets must not at any time exceed 5% of the total market value of the fund’s assets. Where in-house assets for an SMSF exceed the 5% limit, the trustee needs to rectify the breach, usually within 12 months.
An SMSF’s investment in a related unit trust is excluded from the definition of an in-house asset where the unit trust complies with the regulatory requirements contained in Div 13.3A of the Superannuation Industry (Supervision) Regulations 1994 (SISR). Therefore, such investments are excluded from the calculation of the 5% limit. Furthermore, the general prohibition on SMSFs acquiring assets from a related party does not apply where the SMSF’s investment is in a unit trust which complies with those requirements.
Contravention of these conditions may result in the SMSF becoming a non-complying superannuation fund for tax purposes.
This alert applies to arrangements with features substantially equivalent to the following:
Arrangement 1 – Property investments using LRBA
- An SMSF enters into a LRBA post 7 July 2010 to acquire an asset.
- The arrangement has at least one of the following features:
- The borrowing and the title of the property is held in the individuals’ name and not in the name of the trustee of the holding trust. The SMSF funds part of the initial deposit and the ongoing loan repayments;
- The title of the property is held by the SMSF trustee not the trustee of the holding trust;
- The trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset is signed;
- The SMSF trustee acquires a residential property from the SMSF member;
- The acquisition comprises two or more separate titles and there is no physical or legal impediment to the two titles being dealt with, assigned or transferred separately; or
- The asset is a vacant block of land. The SMSF intends to use the same borrowing to construct a house on the land. The land is transferred to the holding trust prior to the house being built.
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. Alternatively the individual or individuals are a member of an existing SMSF.
- A unit trust (‘the unit trust’) is established for the purpose of acquiring a property. Alternatively an existing unit trust can also be used for the same purpose.
- The unit trust is a related unit trust.
- The fund members subscribe for units in the unit trust.
- The fund members may borrow money from a commercial lender to fund the subscription to units in the unit trust.
- The SMSF also subscribes to units in the unit trust.
- 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 asset acquired by the unit trust is used as a security for the money borrowed by the members to subscribe units in the unit trust;
- The assets of the unit trust include an asset that was acquired from a related party of the superannuation fund which is not business real property; and/or
- The assets of the unit trust include real property which is leased to a related party of the superannuation fund, and the real property subject to the lease is not a business real property.