COMPLIANCE
Proper procedure in property purchases Acquiring a property in an SMSF is not necessarily as easy as it seems. Mark Ellem details some of the actions and procedures needing navigation before these assets can be included in a fund’s portfolio.
MARK ELLEM is head of education at Accurium
Australians have a love affair with property and this is no more apparent than with SMSFs. The ATO’s June 2021 quarterly statistical report shows around 15 per cent of SMSF assets are invested in property. However, these statistics include as categories the structures of listed and unlisted trusts, as well as limited recourse borrowing arrangements (LRBA), but not their underlying assets. Based on real property being a predominant asset of these structures, the exposure of SMSFs to the real property asset category could be as high as 20 per cent or even slightly more. This popular asset class gives rise to a number of compliance considerations, including the structure to use to hold real property.
Initial reviews to conduct Prior to an SMSF making an investment in property and any other type of asset for that matter, the following steps should be taken: 1. Review the SMSF’s trust deed – the deed provides the trustee’s power as to what they can do, what they are required to do and what they cannot do. Once you establish what the trust deed says, you can then apply the law to ascertain whether the proposed action by the trustee will comply. 2. Review the SMSF’s investment strategy – it would be prudent for the fund’s investment strategy to be reviewed either prior to or at the time of consideration of the proposed property acquisition. Revision of the strategy and amendment, if required, to the asset allocation ranges would need to be done prior to the fund’s acquisition of the asset. Further, for an investment in property, the strategy should specifically consider the factors in Superannuation Industry (Supervision) (SIS) regulation 4.09 to ensure it has addressed the risks associated with the SMSF having a
substantial portion of its investments in an illiquid asset. 3. Super law prohibition, restrictions or requirements – review the superannuation law to determine whether the proposed asset acquisition is permitted under the law and if there may be any specific requirements to comply with, for example, acquiring business real property from a related party must be done at market value.
Don’t forget the sole purpose test An overriding requirement for any asset acquired or held by a superannuation fund is the sole purpose test, as outlined in section 62 of the SIS Act. This is particularly important where the property is being acquired from a related party under the business real Continued on next page
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