Late-stage property timing mismatch

property sole purpose

Property purchases during the latter part of the life cycle of an SMSF may not meet the sole purpose test.

The ability for SMSF members to be able to contribute to their fund up to age 75 needs to be balanced with the plans of many funds to invest in property assets late in the life cycle of  the fund and the aims of the sole purpose test, according to a technical expert.

SuperGuardian education manager Tim Miller said contribution caps posed a barrier to the acquisition of property, but recent changes to contribution ages created more opportunities, which may not always be suitable.

“The fact that we can now contribute up to age 75 does give us a greater capacity to potentially put more money in over that period of time and then acquire property,” Miller said during a recent webinar.

“When we are, however, looking at something like a small business capital gains tax contribution and putting in large lumps of money towards the end of our working life, to then use that money to acquire property, is that an appropriate decision from the SMSF life-cycle point of view?

“Is that appropriate when entering a phase of the fund where liquidity is probably more important than capital growth?

“You could argue that we are always after capital growth, but the sole purpose test will tell you that the requirement is to pay benefits out to members.

“So, buying property later in life is potentially counterproductive to the way the sole purpose test operates.

“That’s just me spitballing a conversation piece that we can actually have or we have to have with trustees at some time.”

During the same presentation, Miller said the application of non-arm’s-length expenditure provisions to property acquisitions by SMSFs was regulating for worst-case scenarios resulting from some funds breaching the in-specie transfer rules.

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