Overview of Purchase a Residential Property: Rounak is a highly educated and successful IT professional with very little time to conduct personal finance research. Consequently, he relies on experts to guide his decisions. Supported by a strong network, Rounak has maintained a solid track record in investment decisions. Among his assets is an investment property located in the Sydney suburb of Parramatta. This first home of his is something he cherishes and is not willing to sell, especially given its positive cash flow and the substantial rental income it generates.
Rounak has a self-managed super fund (SMSF) and is considering adding real estate to it. To navigate the complexities of SMSF borrowing capacity, he has engaged a broker. During his conversation with the broker, Rounak suggested that if possible, he would sell his positively geared Parramatta property to his SMSF, as it is causing him to pay a significant amount of tax. He would then purchase a property under his own name that is likely to appreciate in value and simultaneously incur fewer tax liabilities.
The broker mentioned that this shouldn’t be an issue and that he knows a tax accountant who could facilitate this transfer seamlessly. Wanting to understand the details, Rounak consulted both the broker and the accountant to clarify the process of transferring his personal property to his SMSF. They advised that the property would be transferred at market value, and the SMSF would borrow funds and cover the stamp duty. Though excited about the possibility of holding the property in his super fund, Rounak remains cautious. He has decided to seek further confirmation of this plan from Investax for reassurance.
Questions
- Can a member of a Self-Managed Super Fund (SMSF) sell his or her residential investment property to their superfund?
- When can a member sell his or her property to their Self-Managed Super Fund (SMSF)?
- Who is responsible for errors if a finance broker and an accountant provide incorrect advice to SMSF Trustee?
Solutions and Recommendations
Self-Managed Superfund (SMSF) Rules Around Residential Property
- Acquisition of Residential Property from SMSF Member: Generally, a residential property can be transferred internally from one owner to another, or from an owner to a trust or a company. The rule is that you must take the market value and pay stamp duty for the transfer. You will also be liable for capital gains tax. However, for a Self-Managed Super Fund (SMSF), this is not the case. A superfund cannot purchase a property from the fund member or any related party of a fund member. The broker and his accountant were not aware of this rule about the superfund. Therefore, Rounak cannot sell his residential investment property to his SMSF.
- Leasing of Residential Property to the SMSF Members: If the Self-Managed Super Fund purchases a residential property, the fund cannot rent the property to its member or any related party of the fund member. For example, if Rounak purchases a residential property in his SMSF, the SMSF cannot rent the property to him, his wife, kids, parents, or in-laws.
Self-Managed Superfund (SMSF) Rules Around Commercial Property
- Acquisition of Commercial Property: An SMSF can acquire commercial property used solely for business purposes from a member or a related party, provided the acquisition is at market value. For example, if Rounak’s property is a commercial office space used exclusively by a business, his SMSF can purchase it from him, as long as the transaction is conducted at market value. Trustees must ensure there is evidence to prove the property’s exclusive business use and its valuation in the financial statements; failure to do so can lead to a breach of superannuation laws.
- Leasing of Commercial Property: Commercial property within an SMSF can be leased to a fund member or related parties of a fund member at market value. Suppose Rounak’s SMSF owns a warehouse. This property can be rented out to his business, or a business owned by a related party, provided the rent charged reflects the market value, ensuring compliance with SMSF regulations.
Who is Responsible if You Unintentionally Enter an Illegal Scheme?
It is not the broker’s responsibility to advise an SMSF trustee on transferring property into a super fund. Likewise, an accountant without a proper AFSL license should not advise an SMSF trustee to engage in such a transaction. As an SMSF trustee, you might be relieved to hear this. However, don’t feel relieved too quickly. As the trustee of a Self-Managed Super Fund (SMSF), it is your duty to understand your investments and the rules surrounding them. You must consult with an accountant or a financial planner who is licensed to provide such advice.
If you are entering this type of transaction assuming that professionals are advising you and thus you bear no responsibility, think twice. When you establish an SMSF, the ATO expects you to understand all the SIS acts, rules, and regulations like a professional. The transaction Rounak is considering, as suggested by his finance broker and the accountant, involves transferring his residential property into his super fund, potentially engaging him in a scheme to access his super before retirement, which can be seen as illegal early access to super.
Navigating the complexities of SMSF investments, particularly in the realm of real estate, requires a deep understanding of the rules and access to expert guidance. If you find yourself in a situation similar to Rounak’s, considering investment strategies or receiving advice from brokers or accountants who may not be experts in SMSF regulations, it is essential to act with caution. We encourage you to reach out to us at Investax, where our SMSF tax specialists are equipped with the expertise necessary to ensure that your investment decisions are compliant and strategically sound. Contacting us will help protect your interests and secure your financial future. Let’s ensure your investments are on the right track.
Pro Tips
- Understand the Restrictions and Consider Exception: Know that SMSFs are generally prohibited from acquiring residential property directly from fund members or their related parties. This rule is in place to prevent potential conflicts of interest and ensure that the fund’s assets are managed for retirement purposes only. While direct transfers are typically off-limits, indirect strategies like purchasing residential property through public listings at market value could be permissible. Always consult a specialist to understand nuanced opportunities within the legal framework.
- SMSF Selling Property to Members: While there are several restrictions on self-managed super funds (SMSFs) acquiring residential property from a member or related parties, these restrictions do not apply when a member or a related party acquires an asset from the fund.
- Verify Expert Credentials: Ensure that any broker or accountant advising on SMSF matters holds the appropriate licenses, especially an Australian Financial Services License (AFSL). This is crucial because SMSF transactions, such as transferring properties, have strict compliance requirements.
- Do your own research: If you receive mixed messages from advisors, try to do your own research. Obtain written confirmation from an accountant, including ATO references, to ensure that the SMSF is not breaching any rules for the actions you are taking as trustee of the fund. For instance, Rounak knew he could not transfer his residential property to his SMSF without breaching the superannuation rules; however, advice from his broker and the broker’s accountant left him puzzled because it didn’t match his research. Consequently, he reached out to Investax for a second opinion.
Reference
https://community.ato.gov.au/s/question/a0J9s0000001Hju/p00044492