The ATO has warned SMSF trustees, particularly those who are first home buyers, schemes to use their fund to purchase residential property are likely to be illegal, in breach of the sole purpose test and may involve illegal early access.
The regulator made the warning as part of a recent statement informing SMSF trustees and members to avoid tax avoidance and early access schemes and noted residential property purchase schemes are often promoted to look like a genuine SMSF investment
“However, they often contravene one or more of the super laws, which may give us reason to view the SMSF as a ‘sham’ and not a legitimate super fund, as providing a member with a current day benefit, and set up and maintained in a way that doesn’t comply with the sole purpose test,” the ATO noted.
The schemes of concern to the regulator, which it claims often target first home buyers looking to purchasing a house and land package, usually involve the use of an SMSF and the rollover of a member’s existing super benefits into the SMSF. The fund then invests in an unrelated property trust which lends money to individuals to purchase real property secured by mortgages over the property.
The ATO said the ‘loans’ from the third-party property trust are put toward the deposit, the purchase price, and costs related to purchase and may also be also used to consolidate personal debt to help secure a home loan while the scheme promoter helps establish the SMSF and the property investment and organises the acquisition of the property.
In eplaining why these schemes were of concern, the ATO said: “the arrangement may also involve the illegal early access of super benefits by members, giving of financial assistance to a member using the resources of the fund, and provision of a ‘loan’ to a member to help them buy a home.”
“When determining whether a scheme gives rise to a contravention of the super laws, we will take a ‘look-through’ approach and consider the arrangement as a whole,” it confirmed.
“If fund monies are used to help purchase a house for a member, indirectly through the SMSF’s investment in other entities, this will be treated as illegal early access of super benefits by the member. The amount will be included in the member’s assessable income and taxed at their marginal rate. Tax shortfall penalties may also apply.”
The regulator warned SMSF members participating in these schemes may also incur administrative penalties and be disqualified from being a fund trustee. Further it suggested any person involved in one of these arrangements should make voluntary disclosure to the ATO.