This article is from the Australian Property Journal archive
SELF Managed Superannuation Funds can only transfer commercial property following the Australian Taxation Office's decision to ban residential property investments, as part of a crackdown of the $400 billion sector.
The ATO Commissioner’s latest ruling on SMSF said “The only real estate you can transfer into your SMSF is business real property. You cannot transfer a residential investment into your SMSF. You also cannot transfer a property that has both business and non-business uses.
“The real estate must be business real property both at the time and after it is transferred into the SMSF,” the Commissioner said.
And the ATO has defined business real property as:
· where the real property is used wholly and exclusively in one or more businesses
· the SMSF or the other entity must hold an eligible interest in real property
· the underlying land must satisfy the business use test, which requires the real property to be used ‘wholly and exclusively in one or more businesses’ carried on by any entity
According to the ATO, if a trustee transfers a business real property into an SMSF, commercial terms, such as a lease must be signed prior to the transfer.
If the trustee of the SMSF also happens to be a tenant of the property, the ATO said an “arm’s length” commercial lease must be signed, or trustees would be in breach of the law.
“You must have a legally binding lease between your SMSF and your business. If you do not have a lease in place you will be breaching the super laws. The lease must be on arm’s length terms at market rent,”
And to further strengthen their crackdown, the ATO said if the rent is below market value, “The lease could be viewed as a way of providing financial assistance to a related party of the fund – a trustee of an SMSF is prohibited from providing financial assistance to a related party of the fund,”
And if the rent is above market value, “The lease could be viewed as a way to avoid the excess contributions tax. The excess rent may be counted as a super contribution and you may exceed the excess contributions cap which could lead to severe tax consequences,”
The Tax Commissioner has recommended SMSF seek a qualified professional if they are unsure of the market rent rate.
The ruling will affect 15% of the $400 billion SMSF sector, which is exposed to real property (approximately $60 billion). Currently residential real property accounts for approximately 25% ($15 billion) of SMSF property assets. By 2015, the SMSF sector is expected to grow to $1.5 trillion – compared to the equities market’s $1.2 trillion. And Rice Warner predicts the sector will balloon to $3.3 trillion by 2026.
The Tax Commissioner has also warned trustees against renovating an property held in a SMSF.
“If you transfer a property into your SMSF, it is important that your business does not carry out significant improvements to the property that becomes an asset of your SMSF. This may breach the super laws as the improvements may amount to an acquisition by the SMSF from a related party,” the Commissioner ruled.
More information on the ruling can be found on http://www.ato.gov.au/superfunds/content.aspx?menuid=0&doc=/content/00310323.htm&page=8&H8
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