Stocks Special Reports LICs Hybrids Technical Analysis Funds ETFs Tools SMSFs
Learn
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features Hybrids Technical Analysis SMSFs Learn Fund Times Ask the Analyst China Wrap
About

News

7 key risks to property investing in SMSFs

Christine St Anne  |  26 Nov 2012Text size  Decrease  Increase  |  

Page 1 of 4

Christine St Anne is Morningstar's online editor.

 

The Australian Taxation Office (ATO) has stepped up its warnings about property investing in self-managed superannuation funds (SMSFs).

ATO acting commissioner Bruce Quigley identified a number of pitfalls SMSF trustees were falling into when it came to investing in property.

"We have also seen instances where holding trusts have not even been established at the time the contracts to acquire are signed," Quigley says.

"In other instances, the title of the property is held in the individual's name rather than the trustee of the holding trust."

He says another common mistake is gearing in a related unit trust, which is not allowed under the law.

He warns that some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified.

For many SMSF trustees, the only option may be to unwind the property agreement, which could prove costly. This could involve forced sale of assets at an inconvenient time, resulting in potential costly stamp duty and tax expenses.

The ATO has paid particular attention to property arrangements in SMSFs involving limited resource borrowing arrangements (LRBA).

Under such an agreement, the SMSF takes out a loan from a third-party lender or from a related party such as member of the fund.

The loan is then used together with the available funds of the SMSF to buy an asset such as a residential or commercial property. This asset is held in a separate trust.

The SMSF trustee has a beneficial interest in the asset, with the trustee of the separate trust being the legal owner of the asset.

The SMSF trustee has the right to secure legal ownership of the asset by making one or more payments. Any investment income received from the asset goes to the SMSF.

However, if the SMSF defaults on the loan, the lender's rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF.

The key benefits to adopting such a strategy include tax concessions, as well as the ability for SMSF trustees to leverage their superannuation savings.

However, as the ATO has warned, trustees need to be vigilant if they are to enter such arrangements.