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Investors with SMSFs need to be cautious when investing in property to ensure they avoid losing their assets, according to recent announcements from the ATO.
Bruce Quigley, acting commissioner for the ATO, recently explained his concerns that investors are using their SMSFs without a full understanding of obligations, while others may be taking advantage of the system.
"We have observed that some arrangements are deliberately entered into to get around the law, which can result in the fund's trustees being disqualified, facing civil penalties or even facing criminal charges,” Mr Quigley warned.
"The fine details are important and trustees need to be sure that property is the right investment for their SMSF and that the arrangement is legal," he said.
"We have also seen instances where holding trusts have not even been established at the time the contracts to acquire are signed. In other instances, the title of the property is held in the individual's name rather than the trustee of the holding trust. Another common mistake is gearing in a related unit trust, which is not allowed under the law”.
When SMSFs are structured incorrectly, it may not be a simple quick-fix to rectify the issue.
“The only option may be to unwind the arrangement, which could involve forced sale of assets at an inconvenient time. This could be very expensive for the fund with potential stamp duty and tax consequences,” he said.
"I urge trustees to get reliable, independent advice when making investment decisions and to obtain advice from us if they are contemplating entering into these sorts of arrangements. The responsibility for ensuring their SMSF complies with the law rests with them."
Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.
Risk is defined as the possibility of an investment having a different outcome from its expected gains or returns.
A self-managed super fund is a private super fund that provides benefits to its members upon retirement, directly managed by an individual for their benefit and in compliance with super and tax laws.