Join Australia's most dynamic and respected property investment community

Legal Tip 90: Can a SMSF buy property jointly with a member?

Discussion in 'Legal Issues' started by Terry_w, 20th Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Can a SMSF buy property jointly with a member?


    Yes.


    The member and the SMSF trustee can own the property jointly as tenants in common. It can be in equal shares or unequal shares. However the property cannot be mortgaged


    Alternatively


    A trustee of a unit trust, X Pty Ltd can own the property and the member can own some units with the SMSF trustee owning the remaining units in the trust. The property cannot be mortgaged.


    The advantage of the second scenario is that with a residential property the SMSF can later acquire the units of the member.
     
    Perthguy likes this.
  2. TwoDogs

    TwoDogs Well-Known Member

    Joined:
    25th Jun, 2015
    Posts:
    55
    Location:
    Sydney
    I have heard doing the unit trust, but wondered if the arrangement was a bit out there and on the grey side. Seems not, but what are some of the downsides,beside no leverage on the asset,

    - any land tax threshold changes
    - splitting of income/expenses between SMSF and member
    - CGT or super contribution on acquiring units from member
    - can the SMSF take a non-recourse loan from the member (or elseware) to buy its units?
    - other known unknowns...
     
  3. D.T.

    D.T. Adelaide Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    5,578
    Location:
    Adelaide, SA
    Is there SD or CGT payable here if it's an IP?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Normal land tax thresholds apply. The type of trust used would probably be a fixed unit trust and the holders of the units would be considered the owners. So the SMSF could use its threshold.

    Income would be split, after expenses, and distributed to the unit holders who would then be taxed on it - smsf 15% generally, then 0% once a pension is being paid.

    A SMSF cannot borrow with one exception to acquire a single aquireable asset. I think it probably could acquire the units if the units were not taken as security and there was no mortgage etc over the property and the units were held is a separate custodian trust - never seen it done.

    If it is an unrelated trust the trust itself could borrow.

    Transfer of units is a dutiable event, but there may not be stamp duty in some states. In NSW it would be 0.60% at present. Much less than the transferring of land which may be 4%. Duty may apply in more than 1 state too.

    Transfer of units is a CGT event too.

    Very complex area
     
    TwoDogs likes this.
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,363
    Location:
    Sydney

    Don't do that !!! That's a breach of s66 when a SMSF acquires trust units from a member. Also dutiable in some states.

    The correct strategy is for the member to redeem units, SMSF acquires more (new) units based on market value. SMSF cash is used by trustee to pay former unitholder. This is the trust "ownership shift strategy". Careful in QLD - Dutiable !!
    No duty generally. BUT... CGT applies on market valuation shift in unit values but that would be trivial.
     
    TwoDogs likes this.
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,363
    Location:
    Sydney
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    No, you're right Paul. It would have to be a redemption, unless business real property.
     
  8. TwoDogs

    TwoDogs Well-Known Member

    Joined:
    25th Jun, 2015
    Posts:
    55
    Location:
    Sydney
    Nice work guys, very informative posts
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,363
    Location:
    Sydney
    Then there is also the partitioned land "scheme" which allows part of the land to be encumbered and part not.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Legally speaking it is possible for one tenant in common to mortgage their interest in the property and I have read some ATO publication that accepts that this is possible for a SMSF jointly owned property. But practically no lender would lend this - other than a related party perhaps.
     
  11. Property Hoarder

    Property Hoarder Active Member

    Joined:
    24th Jun, 2015
    Posts:
    40
    Location:
    Melbourne
    If you are going to invest in a related trust make sure it meets the requirements of a 13.22C trust (99% of funds are not going to meet the in house asset exempt of under 5% of fund assets, but it is a nice thought that a property (and therefore the trust) would only be 5% of your funds assets)

    If the trust meets the requirements of 13.22c the fund can purchase units in the trust from a related party as it is an exemption under 66(2A) of the SIS Act.

    No redemption of units.
     
  12. Property Hoarder

    Property Hoarder Active Member

    Joined:
    24th Jun, 2015
    Posts:
    40
    Location:
    Melbourne
    The arrangement re 13.22c trusts has been clear for a long time. I would not call this arrangement grey at all. A lot of grey in the SIS act, this is not one of them.
     
  13. Property Hoarder

    Property Hoarder Active Member

    Joined:
    24th Jun, 2015
    Posts:
    40
    Location:
    Melbourne
    Needs to be IP. You as a related party can not live in the property (I am assuming here not a pre 11 Aug 99 trust).

    The purchase of the units from a related party would need to be at market (see section 109 of SIS act) and therefore the related party would pay capital gains tax on any gains made from the selling their asset to the fund as per normal.

    No leaving the unit trust units at a value of $1 each and purchasing them at a $1 each time. The market value will need to be worked out each time units are purchased.
     
  14. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,363
    Location:
    Sydney
    A 13.22C Trust does not need to consider the in house asset limitations. Most importantly the trust cannot own an interest in another entity (eg a share in CBA would cause it to fail) also the trust cannot borrow or lend.

    A SMSF cannot acquire trust units from a related party. That still fails s66 which is the general prohibition on the SMSF acquiring an investment from a member, associate or relative. However the trust can issue new units from the trust as the 13.22 trust is not a associate and that does not trigger a s66 concern IF all of SIS Reg 13.22 C and D is satisfied.

    A redemption / new issue also avoids stamp duty concerns in many instances esp in NSW. Trust units should never be transferred without tax / legal advice.
     
  15. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,363
    Location:
    Sydney
    If the unit trust deed prescribes a pricing basis otherwise the deed may pose a concern for Reg 13.22 compliance... The unit trust deed must comply with SISA !! One fatal rule can pose a problem. A large number of unit trust deeds DO NOT include the following features which may only be in a FIXED unit trust (maybe !) :
    - Absolute right of redemption for a SMSF (a non-arms length issue ?)..
    - Valuation methodology that imposes market value unit pricing

    Beware of a unit trust deed which grants any of the following :
    - Trustee right to refuse redemption etc (look for a clause which also says an existing unitholder must firstly have right to buy...Maybe a problem)
    - Non-market valuation of units
    - Income that can be accumulated
    - Non-fixed right to a share of trust income

    Just because you bought it from a large deed provider doesn't make it right.
     
  16. Property Hoarder

    Property Hoarder Active Member

    Joined:
    24th Jun, 2015
    Posts:
    40
    Location:
    Melbourne
    Please read my comments previously posted and

    It can purchase units from a related party under an exemption to Section 66. It is covered under section 66(2A).

    With Super there is always an exemption. Ie the fund can not purchase an asset from a related party but for these exemptions
    A) a listed share purchased at market value
    B) business real property
    C) an in house asset (up to the limit) or an Asset which would be an in house except for an exemption. (an 13.22 trust is an exemption from in house assets and therefore can be purchased from a related party up to the limit allowed for this investment which is 100%)

    Most accountants know A and B but forget about C
     
    Banister and Terry_w like this.