Tax word: super self-managers warned on property

LAST WEEK the ATO warned trustees of self-managed superannuation funds (SMSFs) to be cautious when investing in property. Acting Commissioner of Taxation Bruce Quigley said he is concerned people are using their SMSF to invest in property without fully understanding their obligations under the law, or that some people are seeking to take advantage of certain types of arrangements.

Mr Quigley acknowledged that investing in property can be a confusing area for some people.

''We have observed that some arrangements are deliberately entered in to circumvent the law, which can result in the SMSF's trustees being disqualified, facing civil penalties or criminal charges, '' he said. ''Those marketing properties to trustees under such arrangements could be referred to the Australian Security and Investment Commission.''

Quigley warned that ''the fine details are important and trustees need to be sure that property is the correct investment for their SMSF and that the arrangement is legal.'' The ATO has noted that in some cases where the SMSF has borrowed to acquire the property, required holding trusts have not been established when contracts are signed. In other cases, the title of the property is held in the individual's name rather than the trustee of the holding trust.

Borrowing by SMSFs to buy property is subject to a special body of rules in the superannuation law and are not properly understood by many real estate agents, financial planners, accountants and lawyers. While owning a property in an SMSF may seem an attractive idea, the legal and financial homework must be done. A critical factor is whether the SMSF has sufficient cash flow to pay for regular loan repayments and other property owning costs such as rates, repairs and managing agents' fees.

Another common mistake is SMSFs taking an interest in a related unit trust which has borrowed to purchase a property. Quigley advised that ''some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified. The only option may be to unwind the arrangement which could involve the forced sale of assets at an inconvenient time. This could be very expensive for the fund with potential stamp duty and tax consequences.''

The superannuation law has been enacted to protect savings for retirement. Regrettably, some in the community are seeing SMSFs as a way to their next fortune without complying with the law. Obtaining appropriate professional advice at the outset could save thousands of dollars.

Michael Bannon is a tax consulting partner at Duesburys Nexia, Canberra