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Parent's SMSF IP rented out to son, legal or illegal?

Discussion in 'Legal Issues' started by bonanzawealth, 6th Aug, 2015.

  1. bonanzawealth

    bonanzawealth Well-Known Member

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    Not sure if this has been discussed before. My parents have substansial amount in super and just wondering if it's legal for them to purchase IP in SMSF and rent it out to my brother with proper real estate agent managing it and market rate?
     
  2. sumterrence

    sumterrence Well-Known Member

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    I've heard that it has to be arm's length which depends on how close your brother are with your parents and if your parents can proof they are not receiving benefits from your brother. Im no expert in this area so better some experts can jump in and comment, I'm interested to know as well :)
     
  3. neK

    neK Well-Known Member

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  4. See Change

    See Change Timing Lord Premium Member

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    No.

    You can do it with a business premises .

    Your super can't buy a residential property you own , but can with a commercial you own .
    My understanding is you can buy residential off your super with appropriate valuations .



    Cliff
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Breach of sis act
     
  6. CosmicTrevor

    CosmicTrevor Well-Known Member

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    Have they been advised that this is possible?

    Essentially such a plan is at odds with the Sole Purpose Test, more information on this can be found in the ATO publication "Running a Self-Managed Super Fund" - which should be compulsory reading for all SMSF trustees or people that are planning to set one up.
    By allowing a relative to live in an IP owned by the SMSF it most probably would be argued by the ATO that such an investment constitutes a pre-retirement benefit for a related party and therefore the SMSF Trustee's investment decision was not made for the sole purpose of providing a retirement benefit for the fund members.
    My above interpretation may not be written correctly, regardless, I'm pretty sure your parents would end up losing their fund's concessional tax treatment, face financial penalties that would have to be paid by them personally (ie not from the SMSF) and possibly face criminal charges with associated penalties. In other words, they shouldn't do this!

    Trev
     
  7. bonanzawealth

    bonanzawealth Well-Known Member

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    unnamed.jpg :D?
     
  8. neK

    neK Well-Known Member

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    Non compliance on an SMSF can be quite severe. Not only do you lose your concessional tax status, the ATO can tax you on your entire taxable component.

    For example, your parents may have worked for years and only ever relied on employer contributions or pre-tax contributions they made themselves. Over the years, with earnings, it totals up to $500k between your mum and dad.

    If they get done for non compliance, the ATO can tax their taxable component @ 45%

    http://law.ato.gov.au/atolaw/view.htm?DocID=PSR/PS200619/NAT/ATO/00001&PiT=99991231235958

    Point 28, 29
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Very clear. A complete and total breach and renders them liable to risk or gaol and also 49% tax on the whole of the fund or more.....Likely more. Not a doubt in the world.
     
  10. Redwood

    Redwood Well-Known Member

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    Hi there, as this is a residential property, this would be a breach of Superannuation Law, you cannot lease to a related party, which a son would be.

    Cheers, Ivan
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This is a breach of the SIS Act because it would be an 'in-house asset'. The definition is at s71(1)
    A related party includes a child of a member, s10(b). It would even include the spouse of the child.

    It would be an in-house asset even if there was no legally enforceable lease.

    There are both civil and criminal penalties
    Administrative penalty = 60 penalty units = $170 x 60

    ATO can also fine each trustee up. The fund may also be non compliant and subject to penalty tax rates.
     
  12. Ed Barton

    Ed Barton Well-Known Member

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    What if the fund rented to a friend of the son and the son lived there but was not on the lease?
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It would still be a breach. There are a whole heap of anti avoidance provisions for these sorts of things.
     
    legallyblonde likes this.
  14. alicudi

    alicudi Well-Known Member

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    Hi

    I am not an expert in these issues, in fact I hardly know anything about smsf's.

    But from my point of view a parent can purchase a residential property in their smsf and legally rent it out to any family member or even a child as long as the property is less than 5% of the smsf's total value. Where the smsf holder needs to be careful is if the property increases in value to more than 5% of the smsf's total value in the next coming years they will need to make financial adjustments to suit or else they can be penalised which is a terrible situation to be put in.

    The family member who also lives in the property must also pay rent into the smsf of the owner.

    For anybody serious in doing this and requires further clarification on how to set it all up can contact Maddock's Lawyers because I am not a financial or legal advisor.

    Regards,

    alicudi
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It would be extremely rare for a property to be less than 5% of the SMSF assets - but possible.
     
  16. legallyblonde

    legallyblonde Well-Known Member

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    Man oh man I would love to have a SMSF where a decent resi is less than 5% of the value!
     
  17. CosmicTrevor

    CosmicTrevor Well-Known Member

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    Alicudi, I think you are referring to the in house asset test. If your SMSF had a property to lease to a relative that was worth <5% of its assets then it might be OK, however, expert legal advice should be sought as I'd be concerned about the sole purpose test. The other statement from the ATO that should be reflected upon is "the lending of money or provision of financial assistance to a member or a member's relative remains prohibited under super laws".
    Is leasing to a relative "financial assistance" - I don't know, but I wouldn't proceed without a ruling from the ATO on it.
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes leasing to a relative financial assistance