The latest compliance issue facing SMSF advisers is how to avoid a goods and services tax (GST) property headache when commercial property is purchased by a fund.
It’s relatively easy getting commercial property into an SMSF when the transaction is consistent with the Superannuation Industry (Supervision) rules. But issues can arise when SMSF advisers and auditors take short cuts and the documentation isn’t checked thoroughly.
Important information, such as whether the property has been purchased as a going concern, can get completely ignored, which exposes the fund to both SMSF and GST compliance breaches.
One of the most important pieces of the transaction puzzle – like everything to do with running an SMSF – is the attention to detail.
Getting it right
Buying a commercial property means the purchase contract and all associated documentation should be carefully scrutinised by the fund’s SMSF adviser and auditor.
Only a poor SMSF practitioner applauds the time saved by glossing over the fine print, instead of considering the GST headaches and potential SMSF breaches down the track.
And in the end it would be very difficult, if not downright impossible, to justify how they got it wrong every single time to the ATO, their professional body and insurance company.
What’s the problem?
One easy thing to miss is when the property has been purchased as a going concern and is GST-free.
This requires both the seller and the SMSF to agree the sale was the supply of a going concern under section 38-325 of the GST Act (a more detailed explanation can also be found in GSTR 2002/5).
Depending on which state the property is purchased in, this information can be listed at the bottom of the contact (such as in New South Wales) or included as a special agreement or condition.
The transaction will be treated as GST-free only if all of the following apply:
• payment is made for the supply,
• the purchaser is registered (or required to be registered) for GST,
• the buyer and seller have agreed in writing that the sale is of a going concern,
• the supplier supplies all things necessary for the continued operation of the business, and
• the supplier carries on the business until the day of supply.
But it can start to go wrong when the purchase price of the property is booked in the fund’s financials, excluding GST.
This happens in the blink of an eye, especially when the fund is registered for GST and the SMSF software processes it as a normal transaction. The GST simply gets reversed out of the asset account and is recorded as a separate asset called ‘GST refundable’.
How to rectify the error
Under these circumstances, fund financials have to be amended with the property rebooked at the full purchase price without the corresponding GST refundable.
Where this isn’t picked up, the SMSF may face issues such as:
1. a breach of regulation 8.02B of the SIS Regulations with the incorrect market value of the property asset/s in fund financials,
2. triggering an ATO tax audit that may result in penalties and interest charges.
When the fund has already claimed and received the GST from the ATO, it’s imperative the error is found and rectified as soon as possible.
The ATO has said it may consider a reduction of penalty and interest charges, but it depends on when the voluntary disclosure is made. Generally a reduction will be greater if the disclosure is made before notification of a tax audit is received.
It’s important SMSF advisers remain focused on the fine details and not rely on the SMSF trustee for information or the SMSF software to get it right, as this approach may end up providing significant problems in the future.
What needs to be done
SMSF advisers are strongly urged to review commercial property transactions to ensure they comply with all the governing legislation.
That’s why engaging an SMSF auditor who’s thorough, meticulous and (dare I say it?) pedantic can save you time and money in the long run.
Does your SMSF auditor have the necessary attention to detail to keep your SMSF clients off the ATO radar?
