Shelley Banton, head of technical for ASF Audits, has said that SMSFR 2009/1, paragraphs 90-95, states joint tenancy is prohibited as joint tenants have the right to the whole property and it could “blur the lines”.
“It doesn’t necessarily mean that you can’t compartmentalise the fund’s particular share of that property. Not only do you have a section 66 issue upon acquisition, you may also have a reg 409a issue as well,” she said.
“Tenants in common, on the other hand, is a completely different kettle of fish, which is good, because in that case, you see the distinct share that each owner has on that property title, and each owner can deal with their share of their property however they like.”
If the SMSF does not want to provide security over the property, one of the other parties may decide to do so, or they may take out a mortgage over that property.
“That’s OK, but you need to make sure that it only refers to the other tenants in common, and not the SMSF because we know that if there’s security over the property from the super fund’s point of view, that is going to be a breach of reg 13.14,” Banton said.
“Once again, the devil is in the details. Have a good look at the mortgage, you should be seeing with those tenants in common the particular share that’s listed out on the title. It could be a fraction or a percentage, but it has to add up to one at the end of the day.”
Business real property also has to satisfy some vacancy conditions – that is, the SMSF or another entity must hold an eligible interest in real property, which must be freehold, leasehold or a crown lease.
“Secondly, the underlying land must satisfy that business use test, and the only way that can happen is for it to be used wholly and exclusively in one or more businesses. It has to be purchased at market value to comply with section 66 of the SIS Act and once again just get the valuation,” Banton said.
She warned that this is particularly important because if section 66 on market valuation is not complied with, a fund would not only have to sell the property out of the fund, but there would also be a breach of reg 8.02b, and the NALI provisions may be triggered.
“That will make the fund pay 45 per cent tax on any income coming in before it gets out, as well as 45 per cent on any capital gain on disposal.”
“Additionally, if there’s a related party tenant in that property at the end of the year, at 30 June, when the audit rocks around, you’ve also triggered section 82, which means then you’ve got a defined time frame within which you have to get rid of that property.
“That’s because those in-house assets rules kick in, and you’ve got until the end of the next year of income to dispose of the property. There are lots of different spider legs that come out from just having a breach of Section 66 with market value.”
Finally, Banton said there has to be a lease agreement with the related party that must be subject to an enforceable lease agreement.
