Advitorial – Guest blog by Voulla Flaskos from Source Accounting
Investing in properties in partnership with others via your SMSF can be a fantastic way of getting property in your Fund. However, there are many strict rules and requirements in terms of the day to day management of these investments along with the paperwork requirements that you will need to be aware of. Failure to adhere to the strict legislative requirements can result in your Fund breaching the super rules and being penalised with fines by the ATO. It can also result in you being deemed a disqualified person which will mean that you are no longer able to act as a Trustee of the Fund or Director of a Company.
Although it is always best to invest in property via your SMSF on a standalone basis, some clients just simply can’t afford to do this. With house prices escalating and the increased difficulty to find a commercial property with a decent return, Trustees are now more than ever looking for new ways to invest in property. Investing in partnership with others can be a way that you can get property into your Fund, without having to fork out the entire purchase price.
An SMSF can purchase both residential and commercial property in partnership with others. However, to ensure that the structure remains compliant, Trustees must ensure that the partnership financial statements are operated as if the SMSF is investing in the partnership on its own, with all of the relevant compliance obligations strictly adhered to.
That is basically, the proportion of ownership by each Partner must be carried through the books of the partnership at all times. The SMSF is entitled to its share of the partnership profits (i.e. rent and interest from partnership bank accounts) and must pay for its share of the partnership expenses (i.e. property outgoings including rates, water and sewage, body corporate and land tax).
If an SMSF enters into a partnership arrangement with other individuals, those individuals effectively become associates of the super fund. This means that the in house asset rules may apply.
Potential Compliance issues that arise include the following situations:
- Financial assistance – The property can only be rented to a third party if it is residential in nature. Commercial premises may be rented to a related party, however, there should be a lease arrangement, the rent must be at arm’s length and the rental arrangement must strictly be conducted in accordance with the lease. Rent must be paid on time and in full to avoid a potential arm’s length breach. The terms of the lease arrangement must be no more favourable than if the parties were not related.
- Overdrafts in Bank Accounts – The partnership should have a separate bank account and this bank account should never go into overdraft. If an overdraft occurs, the fund would have breached section 67 of the SIS Act which prevents a super fund from borrowing or maintaining borrowings. The Fund’s Independent Auditor will typically request a copy of the bank statements for the partnership along with the partnership financials annually in order to ensure that this requirement is being met.
- Separation of assets – The SMSF must keep all assets and money separate from any assets and money held by the members and Trustees personally. As such, any investment in a partnership that involves property and bank accounts should all be held in the name of all the partners, including the Fund. If a title search is obtained, then the Fund name should appear as owner on the property title.
- Arm’s length dealings – The Fund should have the correct share of partnership income physically paid across to its bank account and pay for the correct share of partnership expenses. Failure to do this on a will result in a breach of the arm’s length rules contained in the SIS Act.
If there are unpaid profits, then this could be considered a loan from the Super Fund back to the partnership which will also result in a reportable breach if it exceeds the in-house asset limit of 5%.
Owning the property in partnership will lead to additional audit requirements. It is recommended that regular accounts are maintained in order to ensure that the partners are receiving their share of the partnership profits on an ongoing basis.
We can assist you with setting up this structure.
If you are interested contact us (Source Accounting) on 07 3394 4600 to discuss your options.
SMSF Community disclaimer: This article is considered general information only.