Rental property income and expenses - Tenants in common SMSF

Hey there,

I setup an SMSF last year and purchased an investment property with another SMSF. Ownership is tenants in commons (50% share) purchased outright. It was rented out shortly after settlement. We are self-managing the property.

I'm just preparing my SMSF documents for tax and have run into some issues that I would like to avoid this financial.

The main issue stems from how rent is being collected. We initially thought we could setup a joint bank account in the names of both SMSF to receive rent and pay expenses, however the banks we consulted told us it's not possible and they proceeded to setup a joint account under our (trustee) names. The accountant for the other party said rent can only paid into a SMSF account, not a trustee account, however we could transfer across the 50% portion. Unfortunately, this has upset my accountant who has instructed that only the respective portions of rent should be paid into my SMSF account and no more. Similarly, each SMSF party can only pay their portion of expenses. No paying each other back.

I still can't see why receiving rent into the joint trustee accounts is not possible if it's being immediately split and transferred out? Otherwise we'll need to ask our tenants to make two half payments every time they pay rent. They're not the type to schedule these payments.

Hoping to hear from others who have run into this similar situation.

 

Could you use an agent to manage the property, collect the rent and pay expenses on your behalf from their trust account? Then they distribute the net rent at the start of each month 50/50 to each SMSF?

 

An SMSF is not an entity. It can't hold accounts or enter into contracts. the trustee is the relevant legal entity

 

Sorry, I was generalising. A corporate trustee was setup for each SMSF. The banks said a joint account between our two corporate trustees is not possible.

Initially we did have an agent manage the property, but they did an abysmal job with the letting process so we decided to manage it ourselves. We've managed our own personal investment properties so we have experience. It's sounds a bit silly to pay 5-7% of the rental income to have an agent collect rent simply to work around this issue.

 

Did you get advice about the structure of this property investment prior to buying it?

Im not sure Ive ever heard of a company or trustee having a joint bank account with another seperate entity. Has anyone else? As far as I am aware joint accounts are usually for individuals.

Maybe partnerships would be allowed to have a joint account?

Can the two SMSF trustees create a partnership for the investment property and open a bank account that way? This link had some relevant info I think SMSF property in partnership - Source Accounting Australia

 

I'm wondering how outgoings work ? And who is the insured ?

I think the correct situation is the property should have its own TFN and Partnership return and a joint account. The lack of TFN is the problem for the banks. Each smsf should merely reflect its share of net income and its share of interest of the property and that account. This will add extra costs but is the correct basis in each case I have seen.

A very unorthodox arrangement. If I was auditing this I would be closely looking at title, investment strategy and the lease as well as the occupant for the lease. The issue I have with such arrangements occurs if one fund incurs a fatal member event ie death, divorce, lost income, member pensions etc. Both smsf may have to dispose of their interests if the other cannot buy the other interest. This is a sole purpose concern. Not necessarily a breach. Could be a reportable contravention if an auditor fells uncomfortable. The investment strategy probably needs some focus and as its after 30 June that may be a problem. This should have been planned not unexpected.

 

Why would you not direct the tenant to pay 50% of the rent to two accounts?

@Paul@PFI raises several good points about outgoings, diveatment and insurances.

 

Yes could be tricky where one fund goes into pension mode and needs to draw down a min % and doesn’t have enough cash outside the property investment to do so and the other fund is still in accumulation stage.

 

Can you get insurance for 50% ownership in a property? Could be an interesting call to the insurance company! If you are not insured then that’s an asset protection issue and probably in breach of the fund investment or risk strategy..

 

Not needed. If Dave and Martha own a IP they insure as Dave & Martha. So it could be Trustee for SMSF#1 and Trustee for SMSF#2 as owners on policy. There is no reason why two of more co-owners cant jointly insure. It doesnt have to be spouses or just friends. Can be any two or more legal entities too. This TIC position is same for land tax. rates etc.

This issue is a prime example of poor planning and not seeking advice. The structure that could have avoided this would have been a fixed unit trust (Compliant with reg 13.22C and D). In that instance a single trustee company could have been the legal owner with each smsf taking a unitholding interest. Both SMSFs could have Directors of the trustee so neither "control" the trustee and act to ensure the trust remains compliant. At present as a TIC owner one smsf could actually make the ownership non-copmpliant (by agreeing to a charge or giving a guarantee) and BOTH would be obliged to sell and incur penalties. And in many states at a later date the individual smsf % could even be changed without duty

Personally I think the accountant is wrong. Both SMSFs can open a bank account and use that to facilitate income, pay a % share and to equally contribute to pay outgoings. It would need to act like a trust account. This occurs for property all the time. The agent holds the SMSF $$$ and later disburses it. Sometimes it holds the cash to pay a larger outgoing. Not a breach. So why would a joint bank account be a concern ?

 

Oh wow!!! I think I've opened a can of worms here. I'm astonished by the responses received. I'm really surprised to hear that this is such an "unorthodox" arrangement. It seems the accountant for the other SMSF has given poor advice (which I mistakenly relied on) and they should have suggested a partnership or unit trust arrangement.

Outgoing are split equally, with each SMSF trustee paying their portion of the water, rates, maintenance etc. The building and landlord insurance are in the names of both trustees.

Other than to engage an agent to manage the property or ask the tenants to pay rent into the two accounts, setting up a unit trust sounds complicated, expensive, or maybe no longer possible.

We are both in the accumulation phase and will be for quite some time (similar amount of years), however, I do need to look at a plan and agree on how for divestment in case something does happen.

 

They should NOT have suggested a partnership IMO. Its a poor mans structure. (Its actually not even a structure). Its not prohibited. Its just messy and lacks absolute entitlement which a SMSF should always have for any investment. Too late for a trust etc. Fix the problem that exists and dont create another.

There is no reason why a property partnership cant be setup for tax purposes and it can then open a bank account and avoid this silly paying half rubbish.
Look at the SMSF Tax Return. page 4 label I.....See what it says : "GROSS DISTRIBUTION FROM PARTNERSHIP" !!

https://www.ato.gov.au/uploadedFile...ed-superannuation-fund-annual-return-2020.pdf

I suspect the accountant is out of their depth

I Gross distribution from partnerships

Write at I the total of all gross distributions from partnerships received in 2019–20. If the total amount is a loss, print L in the box to the right of the amount.

A distribution from a partnership can include different types of income. Include all types of income included in the distribution at I except:

• capital gains (include these at A Net capital gain)
• foreign income, including New Zealand franking company dividends and supplementary dividends (include it at D1 Gross foreign income)
• part of a distribution on which family trust distribution tax or trustee beneficiary non-disclosure tax has been paid (do not include anywhere in Section B: Income)
• franking credits, if the SMSF is not entitled to a corresponding tax offset (do not include these anywhere in the SMSF annual return)
• the SMSF’s share of net income from pooled superannuation trusts (PSTs)
• non-arm's length income of a complying SMSF (include it at U3 Net other non-arm's length income).

For example, if a distribution from a partnership includes interest, include this interest income at I rather than at C Gross interest.



Keep a record of the following:

• full name of the partnership
• TFN of the partnership if known
• amount of income.

For more information, see Record-keeping requirements.​

 

Hey @Paul, sorry I think some of this is going over my head. Are you saying that the current arrangement is a "partnership" (similar one mentioned and linked to by Curios2019 ) or something else?

If so, then maybe I should try approaching some other banks again to request a joint account for the two trustees.

My SMSF is setup with Esuperfund, so what prompted this forum post was that as part of my tax prep I need to code all the transactions for the past FY. I reached out to the Esuperfund team for advice on how to code transactions for 50% rent being transferred out to to the other trustee, and they said that moving forward I should only receive my portion of rent and only pay my portion of expenses from my SMSF account. No other issues were raised, but I guess things could change once they've reviewed these coded transactions as part of the compliance work.

 

Yes
Yes - perhaps after applying for partnership TFN and ensuring the property income and expenses are reported as a partnership. May need to prepare financials (basic) for SMSF purposes too.
I disgaree completely with the view of paying just 50% and receiving 50%. Its a partnership. Imagine if every property partnership did that. That is 100% wrong.

ESuper...That says it all. You are dealing with offshore covid staff - any one qualified you spoke to ? Probably not. . Not sure if it still is a foreign worker sweatshop in the phillipines or back onshore. Good luck. Ask them why SMSF tax returns allow partnerships.

 

Thanks @Paul. Hmm ok. I guess I'll need to discuss this with the director for the other SMSF and setup a partnership TFN.

I can see now why this 50% split seems unconventional and unfeasible for most partnerships, but from my perspective at the time it seemed to be a simple affair of two long time friends with their own SMSF purchasing and managing an investment property together. In retrospect, I was definitely overly reliant on the other party for advice.

My experience with Esuper to-date has been excellent, so I'm a bit surprised to hear that from you. Any questions I've asked have been promptly and very professionally answered. My most recent response has been from the Client Services Manager, who I believe is onshore.

 

You obviously dont understand SMSF laws yet are expected to know them (they are contained in summary in the deed and the ATO trustee declaration you must each have signed). . There is no such thing as a smsf investing with friends. You each would seem to have been lacking in diligence about your approach. Perhaps cost was a factor. I have seen many cheap smsf setups that have failed to address strategy and purpose. Instead a price at all costs cheap administrator supports "free setup". Free is often the worst value as you can get what you paid for.

A SMSF is expected to consider the needs of its member/s only and from trust law purposes satisfy a test that the SOLE purpose of investing is for that fund and its member at all times.

A few alternatives could have been considered :
1. Unit trust with 2 x SMSFs.
2.A single smsf with two members could have been an option. Far cheaper.

 

@Madbunny you may have indeed gotten more than you asked for with this thread, but hopefully you are learning too!

Super and SMSFs are complicated in terms of tax, legislation and compliance obligations and not generally a DIY type of thing. I’m a Qualified CA and I wouldn’t even bother with an SMSF for myself!

When you say you have an accountant is this someone other than the client manager from e-super? It sounds like you may need an accountant or advisor who knows what they are doing in this space. Pay for some proper advice. Getting it wrong can have lots of penalties and even non compliance notices when it comes to SMSFs.

Your SMSF is for your future retirement, I would never rely on advice from someone else’s advisor, as they have no idea of my circumstances and may not be acting in my best interests.

Good luck!