An SMSF selling a property is not straightforward: legal specialist

Michael Hallinan, special counsel for SUPERCentral, said SMSFs commonly buy an investment property using LRBAs, which can create a complication particularly when selling later on as the property must be held in a separate holding trust by a separate holding trustee until the loan is repaid in full.

“That holding trust is what is called a ‘bare trust’ because the trustee has no discretion or power to deal with trust property but rather must do what the SMSF directs in respect of the property,” Hallinan said.

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He said when an LRBA nears the end of the repayment program the SMSF has three choices.

“Firstly, the fund can decide to leave a small amount owing to the lender and maintain the holding trust indefinitely until it decides precisely what it wants to do with the property,” Hallinan said.

“It can also decide to pay out the loan and transfer the property to the fund as no, or relatively little, transfer duty applies to such transfers, depending on the state involved. Finally, it can decide whether it would like to sell the property to a third party and so arrange to transfer the property directly to that buyer without going through the fund itself.”

Hallinan continued that an SMSF cannot pay out a loan and hold property itself and then hold the property in the holding trust.

“Once the fund pays out the loan the holding trust loses the exemption it otherwise has enjoyed from being an in-house asset. The issue being that once paid out, the property becomes an in-house asset,” he warned.

“SMSFs are restricted to holding no more that five per cent of their total assets as in-house assets.”

When the fund decides to sell the investment property directly to a third party, Hallinan said there are a few things it needs to consider.

“As the holding trust is a bare trust the holding trustee has no power, or right, to sell or transfer the property to a third party,” he said.

“The fund must direct the holding trustee to engage in the sale to the third party and the precise terms of that sale and the holding trustee who will be listed on the sale contract as the seller, not the fund itself, even though the sale is being directed by the fund.”

Furthermore, Hallinan said, the final stage of selling a leveraged SMSF property is a process in its own right.

“Advice is important given that the necessary compliance documents are created, executed, and stored in order to meet the fund’s compliance obligations under the SIS Act,” he said.