The ability to buy property in a Self Managed Super Fund, contrary to popular opinion, is not a recent event. Trustees and SMSF members have always been able to buy property via a SMSF, but what has changed in the past few years is the ability to now borrow money to do so. Prior to 2007 SMSF’s could not borrow money to buy property that it could not afford.
As a result of these changes not only has this led to a frenzy of activity in buying property in a SMSF, but the establishment of new SMSFs to do so has become flavor of the month in recent years.
ATO very concerned
Now that the ATO has had a few years to clarify to us what is allowed and what isn’t allowed when it comes to borrowing money to buy and maintain property in a SMSF, and has had the opportunity to review many SMSFs doing so, consequently the ATO has found some very concerning trends and issues.
The ATO has recently released a statement about areas of concern. Their general findings are that it appears people are investing in property with their SMSF without fully understanding their obligations under the law.
The ATO is very concerned about the number of individuals who:
with no advice are setting up a SMSF themselves, and trying to implement the complete strategy themselves without the appropriate advice; or
where individuals are setting up a SMSF, involving many parties individually with no clear appropriate project manager, and trying to project manage it all themselves with limited knowledge and no experience.
This has resulted in a number of SMSFs becoming non-compliant. Significant penalties have since been issued by the ATO for these breaches.
Like anything in life, people need to go into this type of complex and financially significant strategy with their eyes open. They need to seek appropriate independent advice to ensure that this type of investment strategy is implemented correctly and that the SMSF components required for this investment strategy are set up correctly so that the SMSF does not be deemed non-compliant, especially with something as important as the money a person hopes to retire with.
The complexities of SMSFs with borrowing arrangements cannot be understated. It is vital to get tax, legal and financial planning advice; and choosing one of these professionals to be the project manager for your SMSF to ensure that your fund is set up correctly and remains compliant at all times.
The ATO can impose harsh penalties for those who do not comply with the very strict rules governing what money borrowed through a SMSF and how it can be used. Getting the documentation wrong for the borrowing arrangements can lead to heart-ache and costly consequences. For example, make a mistake and you could end up paying double the stamp duty on an investment property, not to mention having to pay full tax on rental income instead of the maximum 15% that your SMSF should have been able to provide. So it is very important that you choose your Advisers wisely and do not ignore the fine print.
Common mistakes being made by Individuals
Some of the most common mistakes the ATO has identified that are being made by individuals setting up their own SMSF, and which have led to deeming their fund non-compliant and harsh penalties, include:
Using the incorrect entity name on the front page of the sales contract
Purchasing a property directly into an SMSF which has not been set up with a Bare Trustee arrangement
Incorrect lending arrangements where the name of the lender is the incorrect entity
Many SMSFs have been found with rental income and interest expenses coming or going into the wrong bank account.
Using the property for personal use or allowing related parties to do so
Lack of liquidity within the SMSF. Individuals must ensure that not all the assets in the SMSF are tied up in property. They must ensure that there is a reasonable parcel of cash funds available to meet ongoing expenses such as rates, taxes, insurance, etc which must be paid by the SMSF.
Buying property in a SMSF can be a very valuable strategy if it is implemented correctly and it is appropriate for your situation. At Baggetta & Co we have been providing advice on implementing Super and Property strategies for over six years and we have a great deal of experience in dealing with a diverse range of Super and Property transactions. If you are thinking about investing in property via a SMSF, invest some time and money to ensure that it is implemented correctly so you do not waste time and money, and risk your retirement funds.
Paul Baggetta, Founding Partner and Principal of Baggetta & Co, has been a Taxation Accountant for over 32 years, a Financial Planner since 1998 and in 1983 qualified as a Real Estate Licensee holding a Triennial Certificate (currently not trading), and operated his own Real Estate business for over 5 years as a second business.
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