SMSFs warned on sole purpose ‘blunders’ with business property
SMSF professionals with clients wanting to drastically change their investment strategy in order to purchase real business property and free up cash have been warned to pay careful attention to the sole purpose test.
Colonial First State executive manager Craig Day said when discussing investments such as real business property with clients, it is important that SMSF professionals apply an overall filter of sole purpose rather than just looking at individual transactions and rules, or they could find themselves with a significant breach on their hands.
In a recent Colonial First State FirstTech podcast, Mr Day said while an SMSF is allowed to go out and purchase a business real property and lease it to a related party, the fund may run into trouble if the size or position of the property that the super fund wants to acquire is purely predicated on the related-party business needs.
“I had an adviser call me who had a property in the far north-west of Western Australia — literally as far as you could get from anywhere. It was a block of land that he was using to extract some quartz silica sand out of an ancient river bed and what he wanted to do was transfer the property into the SMSF,” Mr Day explained.
The adviser, Mr Day said, wanted to know how to value this particular property because he had not been able to obtain a valuation for it.
“I [asked] why he wanted to acquire it as an investment for his SMSF. The comment that came back was, ‘Well, I think he needs some capital out of the fund’,” he said.
“It was just that expression right there. [I said], well, yes, you will be satisfying these individual specific rules, but if you stop and look back at what the member is trying to achieve here — is that to do with providing retirement benefits? No, this whole decision is predicated on releasing money of the super fund.”
Mr Day said he has also seen sole purpose issues arise with family law separations where clients need to transfer large sums of money.
“We had a situation where a client that wasn’t particularly interested in having an SMSF ended up with an SMSF and the super fund buying his commercial property off him, for the pure purpose of actually paying out a property settlement amount,” Mr Day said.
Advisers, he said, will often question how they provide advice for these types of circumstances where the client is coming to them with a major financial situation on their hands.
He said: “I think [you] need to park the whole discussion about the need for liquidity. What have you got here? You’ve got a client who owns their business that is going through a divorce settlement that needs to pay out and also has a high degree of desire for control.
“Let’s think about this from the perspective that [the client] is at one of these critical turning points of their financial life, and let’s do some wholistic financial planning. If out of the bottom of all of that falls an SMSF being an appropriate structure for [them] and that a property could suit their super fund in these particular circumstances because it lines up with their particular risk profile, then that will be the way you approach the problem.”
Speaking in the same podcast, Coleman Greig principal lawyer Peter Bobbin said advisers and SMSF trustees sometimes focus on satisfying singular rules in superannuation such as it needing to be real business property if it acquired from a member and if it’s leased to an associate it must be at arm’s length.
“In satisfying those very specific rules in superannuation, never forget sole purpose, because how you describe what the intention is, and how you describe the benefit that’s obtained, may actually lead to a circumstance where what is acquired is nevertheless a breach of sole purpose, which, of course, is disastrous,” he cautioned.
Mr Bobbin said the best thing SMSF professionals can do is to help them look at their investments and fund from the perspective of a true retirement objective.
He explained: “In doing that, believe it or not, you’ll actually clean up the biggest blunder the client will have ever made and that might be double fold.
“By not only focusing the client on the true retirement benefit objective, not only will the language now being used to underpin the particular investment be correct and real, but in addition to that, you might even change the client’s mind, they may decide not to go ahead with the particular objective or plan they had in place because they now see that their super should really be used for their future retirement purposes.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.