Anthony Cullen, senior SMSF educator for Accurium, said a partnership is not a separate legal entity, so partners are all jointly investing in a particular asset, or might be running a business together.
“We do need to separate between a general law partnership, where there’s actually a business partnership going on, and a tax law partnership where we might just be in joint receipt of income,” Cullen said.
“More often than not, when we’re getting SMSFs involved, we’re talking about a tax law partnership. A partnership is not a taxable entity, but lodges its own tax return and it is worth bearing in mind that a tax law partnership will not lodge a tax return whereas a general law partnership will.”
He continued that it is important to understand what the difference between the types of partnerships as defined in Section 995-1 of the ITAA 1997 which states a partnership is (a) “an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly”; or (b) a limited partnership.
He added that section 10 of the SIS Act also includes a partnership under the definition of entity, which becomes relevant for other parts of SIS law.
Cullen said one of the more frequent questions that is asked in regard to investing in partnerships is about whether an SMSF can invest when there’s an existing partnership.
“[The scenario] in this case is made up of two partners. One of the partners is a related trust of the SMSF, and the other is an unrelated entity, and the partnership is a commercial property,” he explained.
“Based on the information we’re assuming that it’s a tax law partnership, but it’s one of those things that you probably want to clarify – whether it’s a tax law or a general law partnership.”
He continued that there are generally two options for an SMSF to invest in a partnership. The first is where the fund is going to be an equity investor and become a partner in the partnership and the other option is it becomes a debt investor, so it’s lending to the partnership.
“Looking at an equity investor scenario, the partnership is not an entity in its own right. All the partners have a right to the assets of that partnership so you’re not buying shares or units,” Cullen said.
“What would be happening in this scenario is that you’ve got a partnership which has two partners. If the SMSF is to get involved you’re effectively going to have a new partnership with three partners. You’re effectively creating a new partnership. There’s now three partners, you’re not buying into the partnership in the same way we would a company in acquiring the underlying assets.”
He added that section 66 of the SIS Act prohibits the trustees of the fund from intentionally acquiring an asset from a related party.
“Who are we acquiring the assets from? We assume we’re going to be acquiring part from the related trust, interest in the existing partnership, and part from the unrelated parties interest in the existing partnership,” he continued.
“It’s commercial property, but it isn’t clarified whether it’s business real property. Do we have a prohibition under Section 66 requiring an interest in that property if it is business real property, and we do have an exception and we’re allowed to buy it? That’s one step of the process. We also need to make sure that we’re acquiring it at market value, so we need to make sure that we’ve got those valuations and provide them to the fund’s auditor and or the ATO.”
There are a few other things that need to be considered, he said, particularly when you’re already buying into an existing partnership.
“The question is why are you looking to get your super fund involved in this now? And more often than not, particularly when a property is the dominant asset of that partnership, is that they need a cash injection,” he said.
“Maybe they need to do some improvements to the property, or they want to spruce it up just to attract new tenants or a buyer and they’re a little bit tight for money, so the clients go, ‘Oh, well, I’ve got a super fund. Maybe we can inject some of the super fund money into the partnership’.
“And as soon as you start going down that path, then you start getting into asking if you have a problem with the sole purpose test. Any investments that a super fund gets involved in, the sole purpose should be up there.”
