Residential Property

Joint property ownership opens asset loss risk

SMSF joint property ownership

Trustees need to be aware of the issues that can arise when their SMSF has joint ownership of a property which can result in loss of interest in the asset.

Trustees considering the joint ownership of property with another SMSF should be cautious about this arrangement which may cause them to lose their interest in the property, a specialist legal firm has said.

In a blog post on its website, Townsends Business and Corporate Lawyers said in the event of an SMSF purchasing a 50 per cent stake in a property with another SMSF purchasing the other half, the purchase contract could be a key problem area for trustees.

Trustees should ensure the contract included provisions stipulating the property would be held by both SMSFs as tenants in common, rather than joint tenants, to ensure the property did not automatically transfer to the other owners if one or more of the trustees of the SMSF passed away, it said.

It also noted co-ownership could be problematic for trustees and recommended formal agreements between co-owners in order to avoid future issues regarding ongoing management of the property.

“Without such an agreement there is no certainty as to the apportionment of expenses and income, the insurance for the property, and the first right of refusal in the event that a party wishes to sell their interest,” it said.

“Such an agreement not only facilitates administration of the investment, but also assists any necessary compliance with section 109 of the Superannuation Industry (Supervision) Act 1993, relating to transactions which involve related parties and which therefore must be transacted commercially.”

It highlighted “cross-collaterisation” as a risk trustees could avoid by ensuring the mortgage covering their interest in the property was separate from any other mortgage granted over the remainder of the property.

“This means that if the trustees of the other SMSF default, the mortgagee will only have access to the portion of the property which secures the loan to the defaulting party and not to any other interest in the property,” it said.

“This will make obtaining finance more difficult, but not impossible. It must be discussed with prospective lenders early in the application process.”

It also pointed to the in-house asset rule as another factor trustees should be aware of before agreeing to the shared ownership of a property.

“The property half owned by each fund would not be an in-house asset of either fund though it would not be permissible for either fund to lease the asset to a related party of either,” it said.

“If the two SMSFs decided to invest indirectly by buying units in a trust that owned the real estate, that trust could be an in-house asset of any SMSF which effectively controlled the trust.

“The fact that the two SMSFs are themselves related could mean that the trust is controlled by the entire group of related parties, which could mean that direct investment in the real estate would be preferable to investment indirectly via a trust, which could be a ‘related trust’ and therefore an in-house asset.”

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