Author: Emma Partenza, Manager, TAG Financial Services
When owning property in a SMSF, there are some important rules that you need to get right. We have recently seen some costly mistakes occurring. Here’s a handy list of some of the important ones:
Acquisition of property
- Name on title. The title of a property owned by an SMSF must be registered in the Trustee’s names (trustee company or all individual trustees). As with all investments owned in an SMSF, there must be clear and distinct title of ownership by the SMSF.
- Joint ownership and titles. The same applies for any property that is owned as tenants in common or jointly with another party.
- Borrowing to purchase? For property purchased under a limited recourse borrowing arrangement, the title is registered with the bare/holding trustee.
Property valuations
- Real estate valuations. Investments held by a superannuation fund must be valued at market value each financial year. A real estate property valuation is sufficient for audit purposes.
- How often? You do not need to obtain an external valuation each year, however every three years is a good rule of thumb, unless a significant event has occurred that has impacted its value in the interim.
- Organise valuations now. It’s timely to start contacting real estate agents to ensure an up-to-date valuation is obtained for 30 June 2023.
Rental appraisals
- Real estate rental appraisals. For property rented from an SMSF to related parties, it is also critical to ensure a valuation be obtained from a real estate agent in relation to rental income. This is to ensure related parties are dealing with each other on an arm’s length basis under SIS and rent is paid at market rates.
- How often? A rental appraisal is not required each year, but every three years is a good rule of thumb. This can coincide with the property valuation.
- Rental terms to be updated? An appraisal provides the trustee with options to increase the rent in line with the market, as required.
Lease agreements
- Lease agreement requirement. All properties owned by an SMSF must have a lease agreement in place and it is prudent trustee’s regularly review these agreements to ensure rent is paid on commercial terms and determines who is responsible for certain outgoings.
- Urgent action where no lease in place. Absence of a lease agreement could give rise to the property investment being classified as an in-house asset (where leased to a related party).
Loan repayments
- ATO safe harbour guidelines. For a SMSF who has borrowed money from a related party to finance the property purchase, monthly loan repayments will be made per the loan agreement – which, usually, is based on the ATO safe harbour guidelines.
- Interest rate changes. The interest rate under the safe harbour is release each May/early June. Trustees must adjust the monthly loan repayments in accordance with the new interest rate to ensure the loan terms are being followed.
- The ATO safe harbour interest rate for FY2023:
Real property – 5.35%
Listed shares/units – 7.35%
Insurance
- Consider insurance needs. Adequate insurances need to be considered by the trustees of any fund, whether the investments consist of property or not. It becomes especially complex where property is owned and where there are few liquid assets in the SMSF to be able to service a loan or payout benefits to members, for example.
- Annual review. The SIS Regulations impose a requirement each year on trustees to ensure insurance requirements are reviewed annually.
Issues where property is jointly owned
- Sharing income and expenses. The SMSF will own a set proportion of the property with the other owner. Under joint ownership it is critical that rental income received, and expenses incurred in relation to the upkeep of the property are split in proportion to ownership and the SMSF receives/pays its share in accordance with its ownership.
- For a SMSF to invest in property jointly with another entity, the other party cannot have any additional charges over the title as this causes a breach under SIS Regulations.
- Other entity structures. Property held under other structures, in related unit trusts, for example, also provide further and additional restrictions and complexities to be aware of.
Acquisitions from related parties
- Acquisition prohibitions. The SIS legislation provides prohibitions on acquisition of certain assets from related parties by a SMSF. This includes residential property. However, business real property (BRP) is exempted.
- Business real property rules. The property is not required to be zoned commercial for the property to be classified as BRP. To be classified as BRP, requires the property to be wholly and exclusively used in the running of a business (not necessarily that of the SMSF member’s or their related parties).
- Selling a property. For properties owned by SMSFs, they can be sold by the SMSF to anyone – including a related party. There is no prohibition here. Should trustees wish to live in properties owned by their fund in retirement, they must first be transferred out to the members. Stamp duty and capital gains tax may need to be considered.
Cashflow
- Cashflow obligations. SMSF Trustees need to ensure investments generate sufficient cashflow to be able to pay SMSF obligations as they fall due. This includes annual administration costs, income taxes and pension requirements for members in pension phase (which must be made in cash).
Vacant land
- Cost of holding vacant land. Since 1 July 2019, the costs of holding vacant land cannot be claimed as a tax deduction, and forms part of the cost base of the property.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2023. Please do not reproduce without the expressed written consent of the author.