Get back to basics on SMSF property acquisition
It’s essential that SMFSs and trustees engaging in property developments are aware of the complexities involved as contraventions can occur very quickly, warns a leading auditor and SMSF educator.
And it’s a matter of going back to basics and looking at the rules and regulations that are required from the first time a fund considers adding property to its assets.
Shelley Banton, head of education at ASF Audits, said Australians have had a very long love affair with property, especially in terms of their SMSF.
“Out of the total of SMSFs worth $855 billion as of March this year, 20 per cent was invested in direct property,” Ms Banton said.
“And if you include investment in property through managed funds, unlisted trusts and listed companies, that figure increases to 25 per cent of total SMSF assets.
“While the majority of funds invest in direct property alone, another way of getting property into a fund is by SMSFs joining together with friends’ SMSFs, and other parties and that can be done through either a joint venture agreement or an interposed entity such as a unit trust.”
However, Ms Banton warned the ATO is closely monitoring the acquisition of property into SMSFs and said trustees need to be aware of intricacies of what holding property in a fund can entail.
She said before buying property for an SMSF, it is essential trustees go back to the basics of the rules and regulations that apply from the SIS Act and consult the ATO.
“Our best form of attack is to go back to the starting point, to see what the basic requirements of SIS are to be able to invest in property development and then see what the ATO says,” she said.
“Property development is obviously an area of concern for the ATO and we’re seeing that through the release of SMSFRB 2021 and TA 2023/2.
“The ATO has been very specific about what the issues are. As we all know, fund investments and all transactions have to be undertaken for the specified purposes of providing retirement benefits or death benefits for members and their beneficiaries in order to meet the sole purpose test.”
Compliance with section 62 [of SIS] involves looking at the overall conduct of the fund, she said, and the Commissioner has already said that just considering one aspect and one factor alone will not be decisive in determining whether the fund reaches section 62 or not.
“SMSFRB 2020/1 was released in March 2020 and that outlines that the ATO is concerned about arrangements with related or unrelated parties, which involve the purchase and development of real property,” she said.
“Where the trustee(s) of an SMSF are involved in property development ventures, they have to be able to demonstrate that they made the sole purpose test at all times and this is also a common thread that we see through TA 2023/2, which was released in June of this year.
“In this alert, the ATO doubled down and repeated concerns that SMSFs are being maintained for purpose outside the sole purpose test when it comes to property development.
“One of the things that means is that trustees can’t be influenced by other goals or objectives that’s not related specifically to the fund.
“From an audit perspective, it’s important to be aware that there are no monetary thresholds that apply to reporting breaches of the sole purpose test to the ATO so it will result in a reportable compliance breach if the trustees failed to meet section 62.”
Ms Banton said there are some basic things that are imposed by SIS that the trustees have to consider before the fund invests in property development.
“Right from the start, they have to look at keeping those necessary records with all of those transactions,” she said.
“One of the critical documents is the trust deed which confers those investment powers on trustee or trustees under those governing rules, so it’s very important to ensure that the trustee doesn’t explicitly exclude property development as an allowable investment.
“And in the case where it’s not expressly stated as an allowed investment, we want to be able to see that it permits any allowable investment analysis so that we don’t have any confusion in that particular area.”
Additionally, Ms Banton said before any investments are made, the fund has to have an investment strategy in place that assists trustees in their investment decisions in line with Regulation 409.
“The trustee must formulate an investment strategy that has regard to the whole of the circumstances of the fund, which includes but is not limited to, risk-return diversification, liquidity and cash flow, and whether or not the trustees of the fund should hold a contract of insurance for the members,” she said.
“The trustees have to make sure that all of the investment decisions they’re making are made in line with the fund’s investment strategy, which then has to be reviewed regularly, and is usually done through annual minutes.”
