Playing by the rules when buying assets with an SMSF
We have previously discussed considerations and requirements for establishing a self-managed superannuation fund or SMSF and also the considerations in borrowing to buy an asset in the SMSF.
But you also need to be aware of the rules and restrictions about buying assets in the SMSF, as not all assets are suitable for these purposes.
Read more: Superannuation & planning for tax time
Use of SMSF assets
The SMSF rules detail that your SMSF needs to be maintained for, and any assets in your SMSF held for, the sole purpose of providing retirement benefits to the SMSF’s members or their dependents if a member was to unfortunately die before reaching retirement.
This rule is known as the “sole purpose test”. This test may seem innocuous but on closer examination it is not.
The requirement for “sole purpose” means that even though an asset may be held to obtain retirement benefits, if a member or a related party gains even a small secondary benefit from it then that benefit breaches the sole purpose test.
The sole purpose test may seem innocuous but it is not.
Such secondary benefits that may breach the sole purpose test include:
- Renting a residential property held by a SMSF to a member or a related party, even if it is rented for independently verified, full market rent, and
- Displaying a SMSF-held piece of art in a member’s or related party’s residence or business, even if it is displayed for the purpose of safe keeping while it appreciates in value.
If the sole purpose test is breached, there are potential civil and criminal penalties. Further, contravention also places the status of the SMSF as a complying superannuation fund at risk, which has additional penalties.
Related party transactions
The SMSF rules also details that a superannuation fund, subject to specific exemptions, must not intentionally acquire an asset from a member or related party of the fund. The exemptions to related party acquisition rule include:
- An asset that is a listed security (for example, shares listed on the ASX) acquired at market value.
- If the SMSF has fewer than 5 members – an asset that is business real property of the related party acquired at market value.
- An asset acquired under a merger between regulated superannuation funds.
- An asset of a kind which the ATO determines may be acquired by a fund or class of fund.
The fund must not intentionally acquire an asset from a member or related party of the fund.
The exemption of most interest is often the business real property exemption.
The definition of a business real property includes a freehold or leasehold interest in real property that is used wholly and exclusively in one or more businesses.
Therefore, if a member or a related party of a SMSF owns such premises from which they operate a business, they can transfer the property to the SMSF.
This strategy can potentially provide taxation benefits for both the member and the SMSF in relation to rent paid to the SMSF for the use of the property. There are also potential capital gains tax benefits if the property is later sold.
You should be aware, however, that the transfer of the property to the SMSF may give rise to issues including capital gains tax for the contributing member or related party, and also breaches of the allowable superannuation contribution caps.
The transfer of the property to the SMSF may give rise to issues including capital gains tax.
Again, there are penalties for breaches of the related party acquisition rule, which include potential civil and criminal penalties.
It is important to fully investigate with a financial advisor whether any proposed transaction may breach any of the above rules and to ensure that you do not enter into a transaction that may carry significant taxation or penalty consequences.
Read more: SMSF & borrowing to fund investment strategy
The information within this article is provided for your general interest and should not be relied upon as a substitute for legal or financial advice.