ATO zeros in on SMSF property borrowing

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The Australian Taxation Office (ATO) has warned trustees of self-managed superannuation funds (SMSFs) to be cautious when investing in property.

Acting commissioner Bruce Quigley said he is concerned people are using their SMSF to invest in property without fully understanding their obligations under the law – or that some are seeking to take advantage of certain types of arrangements.

“We have observed that some arrangements are deliberately entered into to get around the law, which can result in the fund’s trustees being disqualified, facing civil penalties or even facing criminal charges. Those marketing properties to SMSF trustees as part of such arrangements could be referred to ASIC.”

Quigley says the finer details are important and that trustees must ensure that property is the right investment for their SMSF – and that the arrangement is legal.

“We have also seen instances where holding trusts have not even been established at the time the contracts to acquire are signed. In other instances, the title of the property is held in the individual’s name rather than the trustee of the holding trust. Another common mistake is gearing in a related unit trust, which is not allowed under the law.”

Also: YIP Feature - Is SMSF right for you?

He says some of these arrangements, if structured incorrectly, can’t simply be fixed.

“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.”

“I urge trustees to get reliable, independent advice when making investment decisions and to obtain advice from us if they are contemplating entering into these sorts of arrangements. The responsibility for ensuring their SMSF complies with the law rests with them.”

For Melbourne residents concerned with the complexities of building a property portfolio through a SMSF, Your Investment Property is covering this topic in its upcoming Melbourne Property Investors’ Forum.

George Nowak, managing director of Charterhill will offer his wisdom on how much funds you need to get started, common traps and mistakes, how to structure the fund to get the most out of tax benefits and how to best manage the process.

Click here for expert advice on SMSF.

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