Look beyond the obvious when calculating tax deductions
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While it may seem advantageous to purchase a retirement property through an SMSF, SMSF clients need to be very careful that these types of transactions don’t breach the sole purpose test, a law firm has warned.
In an online article, Townsends Business & Corporate Lawyers solicitor Elizabeth Wang said some SMSF trustees are attracted to the idea of acquiring a property through their SMSF and leasing it to an unrelated third party at market value until they reach their preservation age and retire as a condition of release.
Ms Wang explained that SMSF Ruling 2008/2 provides that an SMSF may only be maintained for the sole purpose of providing retirement benefits to the members, or to their dependants, if a member dies before retirement.
“It also provides that in determining whether an SMSF has satisfied the ‘sole purpose’ test, one must consider all the facts and circumstances surrounding the trustee’s behaviour in relation to the acquisition of the property,” she stressed.
“For example, if the trustee invests in a property where there is significant likelihood that the investment in the property will not increase any return for the SMSF, and the trustee simply purchased the property because the members always dreamed of retiring to a lovely coastal home, then the ATO may take a sceptical view and rule the transaction a breach of the sole purpose test.”
On the other hand, Ms Wang clarified that if the trustee has supporting documentation such as valuation reports which show that the investment property is likely to provide an increase in return for the SMSF, then the sole purpose test may be satisfied, notwithstanding the ancillary purpose.
Ms Wang reminded SMSF trustees that an SMSF will fail to meet the sole purpose test if the SMSF provides a pre-retirement benefit to a member of the SMSF.
For example, she explained that if trustees decide to reside in the property once they have met a condition of release, they should transfer the property from the SMSF to the members in their personal capacity, she explained.
This will help avoid potentially breaching the sole purposes test, she said, in the event that the trustees residing in the property is treated a present-day benefit or personal use of an SMSF event.
She also noted that the transfer of the property from the SMSF to the members in their personal capacity will result in transfer duty or nominal duty being paid, with the exception of Victoria, the ACT and South Australia where transfer duty on this type of transaction is exempt.
“The trustee must still ensure that the in-specie transfer is permitted under the trust deed. If the trust deed is silent on any in-specie transfer, then the trust deed will need to be updated to allow the in-specie transfer to occur,” she added.