Navigate the ATO Property rules regarding property ownership in a Self Managed Superfund
The ATO Property sets out rules and regulations for SMSFs purchasing property to ensure compliance with the Superannuation Industry (Supervision) Act 1993 (SISA) and the Superannuation Industry (Supervision) Regulations 1994 (SISR).
Firstly, the property must meet the definition of a “single acquirable asset.” This means that the property must be a single property, or a collection of properties that have the same title and are treated as one asset. If the property is a collection of properties, they must be adjacent to each other and have the same zoning.
The ATO Property must also be purchased for investment purposes only. This means that the property cannot be used for personal use or rented to a related party of the SMSF. For example, the SMSF cannot purchase a holiday house and allow a member of the fund to use it for personal use.
The purchase of the property must also comply with the “sole purpose test,” which requires that the SMSF is maintained solely for the purpose of providing retirement benefits to members. This means that the property must be purchased to provide a retirement benefit to members and not for any other purpose, such as providing a benefit to a related party.
When purchasing a property, the SMSF must have the necessary funds to purchase the property outright or have the ability to borrow. If the SMSF borrows funds to purchase the property, it must comply with the “limited recourse borrowing arrangement” rules. These rules state that the lender’s recourse is limited to the asset being purchased, and the SMSF cannot provide any additional security for the loan.
The SMSF must also ensure that it does not breach the “in-house asset” rules. These rules state that the SMSF cannot hold an investment that is more than 5% of the total assets of the SMSF in a related party. If the SMSF purchases a property and rents it to a related party, it must ensure that the rental income is at market value and does not exceed 5% of the total assets of the SMSF.
When purchasing a property in an SMSF using borrowed funds, the ATO Property is typically held in a “bare trust.” A bare trust is a legal arrangement where the trustee holds the property for the benefit of the SMSF, but the SMSF is the legal owner of the property. The bare trust allows the SMSF to borrow funds to purchase the property while also complying with the limited recourse borrowing arrangement rules.
The bare trust arrangement involves two parties: the trustee and the beneficiary. The trustee is the legal owner of the property, and the beneficiary is the SMSF. The trustee has no discretion or control over the property and must act in the best interest of the SMSF.
The bare trust arrangement is commonly used when an SMSF borrows funds to purchase a property. The SMSF applies for a loan and provides the lender with a security interest in the property. The lender then lends the funds to the bare trustee, who purchases the property on behalf of the SMSF. The SMSF is the beneficial owner of the property, and the bare trustee holds the property on trust until the loan is repaid.
The bare trust arrangement is important because it separates the legal ownership of the property from the beneficial ownership of the property. The SMSF is the beneficial owner of the property, but the bare trustee holds the property on trust until the loan is repaid. This ensures that the lender’s security interest is limited to the property and does not extend to the SMSF’s other assets.
The bare trust arrangement also ensures compliance with the limited recourse borrowing arrangement rules. These rules state that the lender’s recourse is limited to the asset being purchased, and the SMSF cannot provide any additional security for the loan. The bare trust ensures that the lender’s security interest is limited to the property being purchased and does not extend to the SMSF’s other assets.
It is important to note that the bare trustee is not responsible for the ongoing management of the ATO Property. The SMSF is responsible for managing the ATO Property and must comply with all the rules and regulations set out by the ATO.
In summary, purchasing a property in an SMSF can be a great investment opportunity, but it must be done within the rules and regulations set out by the ATO. These rules ensure that the SMSF is maintained solely for the purpose of providing retirement benefits to members and that the investment does not put the members’ retirement savings at risk. It is essential to seek professional advice from an SMSF specialist before making any investment decisions.