SMSF traps

TRAPS TO AVOID WHEN INVESTING THROUGH YOUR SMSF

It is no surprise that self-managed superfunds (SMSF’s) are strictly regulated, especially given the fact that a SMSF is a highly favourable tax environment.  A breach of the Superfund Act may result in severe penalties, some so severe you could lose almost half of your fund’s superannuation benefits as a result!

Now that I have your attention, here are a few common traps you should avoid when investing in property through your SMSF:

1. Buying the property from a member

A fund cannot buy a property from a member/associate of a member, unless it is business real property. The fund must pay market value for the property and the acquisition must be in line with the fund’s investment strategy.

2. Allowing a member to use the property

When a fund buys a residential property from an unrelated party, it should not allow any member/associate of the member to use the property, not even for a single day of the year!  Business real property is an exception – a fund can lease it to a member for the purpose of carrying on a business, provided that a market related rent is paid.

3. Borrowing to buy a property via an incorrect structure

It is possible for a SMSF to borrow through a limited recourse loan, but it must be carefully structured to comply with the law. A bare trust must be setup as the legal owner of the property. The fund will take legal title of the property once it has been paid in full. Professional advice is recommended before a contract is signed for a fund to buy a property under a borrowing arrangement. Getting the contract wrong may give rise to additional stamp duty when the loan is paid out and the beneficial interest in the property is transferred back to the fund. It could be an expensive mistake indeed.

4. Developing the property

SMSF’s cannot change the nature of a property acquired under a limited recourse loan, which limits the amount of work you could do on the property to increase its value.  You are allowed to maintain the property (repair and restore the property back to its original condition), but care must be taken if you are planning to improve the property (professional advice is recommended).

As you can see, using a SMSF to invest in property could be a minefield. The consequences of a material breach and losing your complying status are unthinkable.  Please contact Optima Partners before you take any action.

Petro Groenewald

Chartered Accountant/SMSF

OPTIMA PARTNERS