Purchasing a property through a SMSF

[The Trump]

Hi guys

I have a question in relation to a potential purchase of a property within my SMSF and was seeking some advice if it would be allowed or not.

My aunty has a property on the coast that she is looking to sell and I am considering buying it through my SMSF.

She hasn't actually lived there for a number of years and rents the property out as a holiday let during the summer and winter months.

Based on my understanding you cant buy property from a related party in a SMSF.

However given that the property is infact a holiday let and is effectively run as a business would I be allowed to purchase it from her.

Look forward to any replies

 

[Aaron_C]

First question is whether buying from your auntie is considered a 'related party'? I doubt she's a member of your SMSF?

 

[Terry_w]

Yes, an aunty would probably fall under the definition of a related party - an associate of a member.

But, it may still be possible if the property is 'business real property'.

read SMSFR 2009/1

Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993

 

[coastymike]

Yes dont need to be a member of the smsf in order for the person to be a related party under the SIS Act

 

[redwing]

You are a veritable font of info Terry, we are lucky to have you on board

 

[coastymike]

SMSFR 2009/1 has an example of ms hend who holds two holiday units on the coast used for short term rentals. ATO considers that due to the size two wouldnt be considered to be business real property so depends on how many she owns and how she handles the operation of such.

 

[redwing]

Related on Non Related IYHO for the Trump then?

 

[wylie]

I was recently advised that I could not buy my late father's house in a SMSF. It had nothing to do with who was party to my proposed SMSF, but that it was my late father's house. I don't know how far the family tree goes in this regard?

 

[Terry_w]

I was recently advised that I could not buy my late father's house in a SMSF. It had nothing to do with who was party to my proposed SMSF, but that it was my late father's house. I don't know how far the family tree goes in this regard?

Actually, this may be debateable. If the executor of the estate was a third party - ie unrelated- it may have been possible.

 

[Aaron_C]

Actually, this may be debateable. If the executor of the estate was a third party - ie unrelated- it may have been possible.

So no one knows the answer? Maybe the test should be if you can't marry that person under law, then you can't buy a property off them with your SMSF?

 

[wylie]

Actually, this may be debateable. If the executor of the estate was a third party - ie unrelated- it may have been possible.

I am one of the executors.

 

[Terry_w]

I am one of the executors.

You might be related to yourself?

 

[Terry_w]

So no one knows the answer? Maybe the test should be if you can't marry that person under law, then you can't buy a property off them with your SMSF?

Differenet people know different answers. The law says you cannot buy off a related party. If title is in a unrelated executor's name you wouldn't be buying off a related party even if the deceased was a family member. But ...

Many people marry their cousins, common in Muslim communities. So this test may not work.

 

[wylie]

You might be related to yourself?

I don't think so. I don't even look like myself any more .

 

[perthguy]

Actually, this may be debateable. If the executor of the estate was a third party - ie unrelated- it may have been possible.

That makes me wonder... if you put a house up for public auction and your SMSF was the highest bidder, would that be legal? It would be a win/win in a way... if the price when over what you are preapred to pay... you are in front. If not, then you get to sell your house to your SMSF.

 

[Aaron_C]

That makes me wonder... if you put a house up for public auction and your SMSF was the highest bidder, would that be legal?

It wouldn't matter what method of sale it was - you simply can't buy from related parties.

 

[vaughan]

...She hasn't actually lived there for a number of years and rents the property out as a holiday let during the summer and winter months...

The bubble might be about to burst for holiday and other short term letting in residential areas. There was a court case recently about a hose in Terrigal, and the implications are quite wide-ranging: one is that the council should have been more active in preventing the short-term letting. So it is likely that they will be on the look-out in the future.

"The property was zoned residential and short-term letting was prohibited under the Planning And Assessment Act."

Read more: http://www.smh.com.au/nsw/loud-part...tells-court-20130423-2ic4p.html#ixzz2uOe6KEbJ

http://www.dailytelegraph.com.au/ne...ting-was-illegal/story-fngr8h0p-1226636891467

AirBnB letters are also finding themselves on the wrong side of the law, too.

 

[Paul@PFI]

That makes me wonder... if you put a house up for public auction and your SMSF was the highest bidder, would that be legal? It would be a win/win in a way... if the price when over what you are preapred to pay... you are in front. If not, then you get to sell your house to your SMSF.

The issue in this case falls on the word "intentionally". If you were to bid blind on a property and after hammer fall suddenly realise that the vendor is your brother in law's company that may be OK. Your example I would suggest No. SIS s66 requires an intention to acquire which provides an escape to an inadvertent acquisition. I have never seen such a case. Most people make enquiries before such a large financial commitment.

Subject to subsection (2), a trustee or an investment manager of a regulated superannuation fund must not intentionally acquire an asset from a related party of the fund.

 

[Paul@PFI]

Hi guys
However given that the property is infact a holiday let and is effectively run as a business would I be allowed to purchase it from her.

I'm a bit surprised everyone has said "no". The answer is Yes you could but its a complex process and subject to many conditions. A SMSF cant directly acquire it from the aunt. I think that issue has been well addressed. But there is another way.
1. A Unit Trust with a company trustee acquires the IP
2. You use OTHER assets as loan security (ie own home, other IP etc). You draw those funds and use them to buy units in the trust. It then has the cash to buy the IP.
3. You are the 100% unitholder in the trust. You get neg gearing benefits for three years.
4. The IP is not used as loan security ie no charge, no mortgage.
5. You remain unitholder for THREE years plus one day.
6. After that period the trust issues new units to the SMSF. You also redeem 100% or less of your units. The SMSF thus becomes a beneficial owner in the trust rather than you. Yes a CGT event for the unitholder. The SMSF must acquire units based on the market value at that time. You would payout loan etc.
7. This issue in QLD may attract stamp duty however. QLD has an indirect duty rule on trusts that hold property. The SMSF exemption may not apply and a OSR decision can be sought prior to acting.

Prior to considering such an arrangement you should seek competent advice. The difference with the arrangement I propose is that SIS Reg 13.22C allows an ungeared unit trust if the trust property waits out three years. It sanitises the related party concern. I have been involved with many people who are happy to wait this period of time to get their way. Reg 13.22 has some catches and must be strictly complied with.

A common question I will also address - A SMSF loan (LRBA) cant bypass s66 as LRBA's have a anti-avoidance rule which prevents a LRBA which would otherwise be prevented by s66.