Often Missed / Forgotten SMSF Strategies

Wish I had a $1 for everytime I had been asked about how to get property assets (or other assets) into a SMSF. Secret to it all isnt a secret. Its good planning made years earlier and I cant under state the importance of that issue. We see loads of questions on PC that ask - What name should I buy in ? When it comes to a property years and years later that choice can come back into question.

But lets get back to the problem of getting property into super. Likely a SMSF as its the only type of superannuation entity that can buy direct property at the direction of the members.

A few often overlooked strategies

1. Sell the property to the SMSF at market price. Sorry, thats prohibited if its a residential property. s66

2. Die ? Yeah thats another way but it comes with a catch. The dying bit is part of the problem. As you can only inherit estate assets (ie under a will) then thats also a problem. So what follows is the suggestion of BUYING the property from the deceased estate. Lets look at point 3.

3. Buying from the deceased estate. This may also be prohibited in the legal personal representative (executor/s) are related parties. However if a arms length executor handles the estate this can be a strategy. Paying a professional executor is the heart of the trublem. Leave it to an executor company and they may well sell the asset - To someone else. Or ignore the request. So a friendly executor is important. Perhaps a family lawyer ? Discuss options and your wills with a legal adviser is my tip.

4. Divorce / relationship breakdown. s66 of SIS Act contains a further exception. This allows a SMSF to intentionally acquire assets from a member / associate arising from a marital breakdown under the Family Law Act. Again requires legal advice but is a strategy often ignored. Specific care must be taken about tax elements and tax advice / financial advice is also important. This strategy may also be combined with spouse transfers.

5. Fund merger rules. s66 again. It has a specific provision which barely rates a mention. s66(2)(c). Question must be asked - what is a fund merger ? That occurs when assets of one fund are moved into the other fund. Say two SMSFs become one. Or one SMSF becomes two. Or three etc. This provision often gets novice smsf advisers excited but it does come with some traps. Like s66(3) which is the general SMSF anti-avoidance rule. It prevents schemes that breach s66. Its an exception really for assets in one super fund to get into the other without triggering the associate rules if related members exist. Its a great rule for merging or de-merging funds to save costs or use different strategies. ie split adult kids into their own SMSF

6. Assets under the 5% inhouse assets rule. Inhouse assets are a pain and can have a 5% limit in the fund. But they are an exception. So what is a inhouse asset ? A good example came up for a client in recet years. He personally owned a share in a ski lodge. The lodge needed to borrow funds for capital works. The member asked if the fund could lend the money. Sure - The value was $30K. The fund value $1.9m. Its under 5% of the fund assets and was not a member benefit in breach of sole purpose test. Prior to making the loan the auditor agreed it was OK as under the in-house asset limit of 5%

7. Assets approved by SIS Regulations. s66(d). This is the one many inexperienced advisers will tell you could be a scheme. If they do its wrong.
SIS Regulations contain several exceptions to prohibited investments. Division 13.2A needs to be considered

• Pre-99 geared unit trusts. These are grandfathered and retain access to the former rules. Detailed legal advice is needed for changes to such a trust
• Related party leases for real business property (ie SMSF owns a factory unit and it is leased to the related business).
• A company or a UNIT trust which is interposed to own property (resi or otherwise) provided a range of conditions are met (ie cant borrow or have a charge on the property). Often called the ungeared trust rules - Reg 13.22 C and D
• Widely held trust rules. A widely held trust which the SMSF has a minority interest which DOES borrow

However Reg 13.22D does contain a further exception to s66...The 3 year waiting period rule.
Reg 13.22D (1)(n) contains a exception that many arent aware of. It allows a member (for example) to sell / transfer a property to a unit trust that does not borrow and then wait three years. Aftre the 3 years ends the SMSF can acquire 100% of the interest in the trust - NOT from the member., Instead units are issued to the smsf and the former unitholder redeems their units.

 

Is it possible to purchase the house from your parents as an investment property in SMSF and let unrelated, 3rd party in as a tenant??

 

not directly.
but your question is vague. If you are a member of the SMSF the answer is no.

 

No. Assuming your fund then as a member your parents are Part 8 associates. This means the fund CANNOT buy a property from them. Even if its market rates. It is a prohibited acquisition see s66(1) SISA. There is a way but it does require that the property not be used as loan security for three years and that it be owned by a unit trust during those three years. Only after the three years can the SMSF buy units in the trust subject to some other conditions contained in SIS Reg 13.22C + D

If you are a member of the fund neither you or any other relative may rent or use the fund (or trust) property even if they pay market rent.

 

I should open up a business where people sell me their house and buy it back off me at a slightly higher rate....that should take care of the arms lengths issues

 

Thank you for your replies, I was hoping to help parents sell Sydney property by purchasing it into SMSF....

 

You can help parents - just not your parents!