In a recent blog post, Townsends Business and Corporate Lawyers’ Michael Barsha said it was important for trustees to think about having a co-ownership agreement in place if they were considering jointly purchasing a property, in order to have legal protection in the event that they needed to sell the property to fund member benefits down the line.
“Should [a] fund need to sell the property in order to make payments to its member, the right to sell and/or the right to refuse sale will be of paramount importance,” Mr Barsha said.
“In the absence of a co-ownership agreement, the matter is likely to end up in court, causing excessive financial and emotional distress, not to mention the huge amount of time usually required from the court system.”
Mr Barsha used the example of Ms Squidward, who is the sole director of the corporate trustee Bikini Bottom Holdings for her SMSF the Squidward Superannuation Fund. Ms Squidward wishes to purchase a two-bedroom apartment as part of her SMSF’s investment strategy, which she will own jointly with her friend, Mr Spongebob.
As Ms Squidward and Mr Spongebob are not related parties for the purposes of sections 70B to 70E of the SIS Act, the transaction to purchase the property jointly would be valid. However, Ms Squidward would need to keep her fund’s investment strategy, which requires her as director of the trustee to be able to fund member benefits in retirement, in mind.
“The proposed co-ownership agreement will have a substantial influence on the transaction and may affect the fund’s investment strategy in the future,” Mr Barsha said.
“Generally, a co-ownership agreement will state the rights and obligations of each co-owner with regard to the administration of the property. Important provisions may refer to, but are not limited to, the right to sell or force a sale of the property and the right to refuse proposals of sale.”
Formalising each party’s rights and responsibilities would help to better ensure Ms Squidward’s fund had a compliant investment strategy that took note of the trustee’s ability to pay member benefits, Mr Barsha explained.
“The ATO has greatly emphasised the need for SMSFs to formulate and incorporate a clear and transparent ‘investment strategy’ when acquiring real property. Generally, this involves the trustee proving that they have developed a methodology for the purpose of accumulating the fund’s superannuation benefits,” he said.
“As Ms Squidward’s fund trustee is purchasing the property as part of that fund’s investment strategy, the right to sell (and refusal to sell) are important prerogatives which ought to be formalised in a co-ownership agreement.”
