Joint Ownership of Property and SMSFs

Purchasing a property in a self managed superannuation fund (SMSF) can be a very attractive option for a number of reasons. But what happens if your SMSF does not have enough funds to purchase a property outright? Navigating the rules of the Superannuation Industry (Supervision) Act 1993 (SIS Act) can become a minefield when purchasing a property in an SMSF.  Breaching the rules can have unintended consequences and bring about hefty penalties, or worse, a prison sentence.  

Before you commit to purchasing a property in your SMSF, you should remember these things:-

Can I purchase the property in my SMSF jointly with another party?

The short answer is yes, however joint acquisitions of property must be done on an arm’s length basis.  The following are potential co-owners:-

Individual

This person might be you or another third party such as a friend that has enough cash to fund the purchase.

With another SMSF

Two SMSFs can purchase a property together a property as tenants in common.

What share in the land is up to the SMSFs. Any rent as well as costs and expenses are then applied according to these percentages.

Unit Trust

Commonly, a unit trust would acquire the property and the SMSFs would acquire units in the trust.

If your SMSF is purchasing a property jointly with another individual or SMSF, you it is advisable to enter into an agreement that records the arms’ length nature of the relationship and includes terms about what happens if one party wants to sell or buy the party’s share or if a Trustee dies or if an SMSF is wound up.

Can I purchase the joint owners’ share in the future?

Let’s say for example, Fund A runs a mechanic business and purchases a commercial property as tenants in common in equal shares with SMSF, Fund B.  The members are related.

Generally, section 66 of the SIS Act prevents an SMSF acquiring an asset from a related party of the fund. An exception to this is the Business Real Property Rule (BRP Rule). The SMSFs should enter into a Lease with Fund A’s business to comply with the BRP Rule which will allow Fund A to purchase their parents half of the property in the future.

Keep in mind that if for example the property is a residential property then future acquisitions (from related parties) is prohibited.

What other options does my SMSF have where it doesn’t have enough cash to buy something?  

The SIS Act prohibits SMSFs borrowing (except in very limited circumstances).  

The SIS Act also allows Limited Recourse Borrowing Arrangements which involve the SMSF trustee taking out a loan from a third party lender. The trustee then uses those funds to purchase a single asset to be held in a separate trust. As the name suggests, if the SMSF defaults the lender's rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF (the intention being to preserve retirement benefits for their retirement).

LRBAs are not for everyone and we strongly recommend that you obtain advice before entering into one given there are a number of complexities.  It is also important to ensure that trustees and advisors understand the correct timing and procedures for implementing one.

You should obtain specific advice on the Duty and Land Tax implications with respect to the structure of the borrowing and all transactions contemplated by it. You should also ensure that you have obtained advice of the taxation implications of the arrangement as these can have significant consequences for taxes such as stamp duty, CGT and GST. 

Before you do anything you should ensure you have letter of offer from a financial institution before you go to the expense of setting up the necessary structures.  The big four banks to do not lend to SMSFs.

If you cannot find a lender it is possible for related party to obtain a loan and then in turn act as non-recourse lender to the SMSF trustee.  The commercial terms must be arms-length terms.  The ATO has publishes annually “safe harbour” guidelines to make things clearer.  Importantly LRBAs that do not meet the safe harbour terms fully will not automatically be deemed to be dealing on non arm’s length terms.  Rather the onus will shift to the trustee to demonstrate that those LRBA terms were entered into and consistent with an arm’s length dealing.

If you require any assistance in implementing an LRBA or co-ownership arrangement please contact us.