On 20 November 2012, the ATO issued Taxpayer Alert TA2012/7 (the Alert). The Alert outlines the ATO's concerns with certain features of SMSF property investments, particularly those involving:
The Alert highlights some key rules that an SMSF must follow to comply with superannuation law, including:
The Alert describes certain features of SMSF property investments which concern the ATO. The ATO highlights these as putting an SMSF at risk of becoming a non-complying superannuation fund, and therefore at risk of incurring the onerous taxation penalties which may flow from its non-complying status.
A number of the ATO's concerns relate to investments that are not authorised investments under superannuation law. The ATO has previously provided extensive commentary on some of these issues, including in relation to 'acquirable assets' (see our ClearLaw article of June 2012 here).
The Alert identifies the following features of an SMSF's property investment, each of which separately or in combination, concern the ATO:
The ATO considers that an LRBA with one or more of these features may result in the SMSF breaching the Superannuation Industry (Supervision) Act 1993 (SIS Act), including:
The feature that causes the most concern to the ATO is the timing of the establishment of the custodian and the custody trust - we discuss this in greater detail below.
The balance of the compliance issues are relatively straightforward - for instance, the SIS Act plainly states that the custodian must hold the title to the property. Likewise:
There has been significant discussion in the sector about the ATO's concern with a contract being signed to acquire an asset before the custodian and the custody trust exist. However, the ATO does not provide much in the way of reasoning and clearly needs to.
There are differing practices across the SMSF sector when establishing a custody trust, often due to concerns about differing stamp duty regimes applying in different states. These practices can involve the SMSF trustee entering the contract of sale to acquire an asset and, at some time before completion, establishing the custody trust and nominating the custodian as the purchaser of the asset.
Generally, best practice is to execute a declaration of custody trust at the same time as the contract of sale to acquire the asset. In that situation, the custodian must exist prior to signing the contract of sale.
It may be that the ATO is concerned whether the property was acquired with the intention that it would be purchased by the SMSF - if so, it would be important for the SMSF trustee(s) to be able to evidence its intention to buy the asset when the contract was signed rather than the relevant parties deciding after the fact that the SMSF would purchase the asset.
If that is the nature of the ATO's concern, then the best way to evidence that intention is certainly to ensure:
Otherwise, it may be possible to provide other evidence of the parties' intentions such as correspondence, source of deposit moneys or instructions to advisors.
Given that the ATO has not spelled out why it is concerned with a transaction occurring in this order, until it does so, it would be prudent for SMSF trustees to:
The ATO is also concerned that some characteristics of certain unit trust arrangements may:
The ATO is concerned with related unit trusts in which both the SMSF members and the SMSF subscribe for units in the trust, including where the SMSF members may borrow money from a commercial bank to fund the subscription. The trustee of the unit trust then purchases a property which is rented out.
The ATO is concerned about unit trust arrangements having the following features that do not comply with superannuation law:
As with LRBAs, it is important that SMSF trustees take care to ensure that both the structure of the arrangement, and the investments made pursuant to the arrangement, comply with superannuation law.
If the arrangement does not comply, then the SMSF's investment in the unit trust will be subject to the in-house asset rules - meaning primarily that the SMSF's investment in that unit trust (together with other related party investments) may total no more than 5% of the value of all the SMSF's investments.
You can access the full Alert here.
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Superannuation team.
You can read articles on a wide range of SMSF topics here.
 Section 62 of the SIS Act.
 Section 62 of the SIS Act.
 Section 67 of the SIS Act.
 Section 83 of the SIS Act.
Daniel is a Senior Associate in the Maddocks Tax & Revenue team.Daniel advises extensively in the following areas:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.