With the ATO closely monitoring property investments made through superannuation funds at the moment, it is vital that investors ensure they are across the rules.
Earlier this year, ATO assistant commissioner Dana Fleming said the ATO had some concerns in relation to property investments made through self-managed superannuation funds (SMSFs), particularly where borrowing is involved.
Ms Fleming said the ATO was concerned that some SMSF investors may have entered loans to purchase property through their fund where it posed a lot of concentration risk for the fund.
“What I mean by that is that over 90 per cent of the assets in the SMSF are in one property. In the current landscape of the declining property market, particularly in Melbourne and Sydney, that does cause us concerns,” Ms Fleming said.
The ATO has stated that it will contact SMSF investors in some cases to ensure they have properly considered diversification and liquidity risk in their fund.
In addition to considering these types of risks, investors also need to consider some other very important rules if they want to stay off the ATO’s radar.
In order for an SMSF to remain eligible for tax concessions normally available to super funds, it needs to be maintained for the sole purpose of providing retirement benefits to members, the ATO stresses.
Failing to meet the sole purpose test is very serious as the fund loses its concessional tax treatment and trustees could face civil and criminal penalties.
The sole purpose test may be contravened where a member or anyone associated with a member receives a financial benefit from the property investment, other than increasing returns for the fund.
Even if a property is leased at market value to related party, the ATO said this doesn’t prevent it from contravening the sole purpose test.
The ATO also makes it clear that the property cannot be acquired from a related party of a member, must not be lived in by a fund member or any fund members’ related parties and must not be rented by a fund member or any fund members’ related parties.
Sole purpose breaches and acquisitions of assets from related parties continue to be some of the common contravention categories for SMSF investors, according to the ATO.