Property shifts into funds need scrutiny

SMSF property sole purpose

SMSF trustees looking to move property into their fund should be questioned as to what their plans and motives are to avoid breaches of the sole purpose test.

SMSF trustees looking to bring commercial property into their fund need to have their motives questioned to ensure they understand what they are doing and how it meets the sole purpose test, a technical expert has recommended to practitioners.

Colonial First State head of technical services Craig Day said SMSF advisers who had recommended clients buy business real property within an SMSF and lease it back to themselves had not made a mistake, but had to ensure the purpose of that advice was consistent with the sole purpose of the fund.

“What you really need to think about here is to make sure it’s all about retirement,” Day said during his presentation at last week’s virtual SMSF Association National Conference 2021.

He used as an example a farmer purchasing land via an SMSF and that the farmer would have some investment knowledge in relation to primary production property, the expected risk and return from the land as an asset and how it would be able to meet investment objectives, as well as the impact on the fund’s liquidity and cash flow.

“In this case, the farmer is actually demonstrating that it’s a legitimate investment decision about retirement and not just buying the land to provide a benefit to a related business,” he said.

The same criteria had to be applied to related-party business real property acquisitions as they were often used to raise capital and were likely to breach the test, he said.

He said his team often found that a decision by a trustee to buy business real property from themselves was a search for capital and was common in divorce property settlements.

“They own a commercial property in their own name and don’t want to have to sell the commercial property,” he said.

“They need to keep control of it, but they need to pay the ex-spouse out and think they can get the SMSF to buy the commercial property and lease it to themselves,” he said, adding similar approaches were taken by businesses struggling with debt.

“What is the purpose of that investment? Is it about retirement or about something else?

“In these cases, you see clients in desperate circumstances and you want to try and help, but you know that investment in that business real property might be the worst decision ever made, so you have to work with the client and steer them through and keep them directed to the fact that superannuation is all about retirement, nothing else.”

He also noted around 60 per cent of SMSF contraventions recorded by the ATO relate, in some part, to breaches of the test, which often overlapped with other failures by trustees to maintain their obligations.

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