Property and SMSFs: loosening the rules
If your SMSF has borrowed money (or thinking of borrowing money) to acquire ‘bricks and mortar’ property then there are a few things you need to know.
A new ATO ruling released last month helps to clarify what you can and can’t do with property that is under a limited recourse borrowing arrangement (LRBA).
The ruling addresses three key areas:
- Under the borrowing rules in the Superannuation Industry and Supervision (SIS) Act, the borrowing must be used to acquire a “single acquirable asset.” The ruling seeks to define what constitutes a single asset.
- The borrowing rules allow an asset that is held under a borrowing arrangement to be improved, however, the trustees cannot use borrowed funds to make the improvements. There is a fine line between what is a repair or improvement and the ruling attempts to clarify how the ATO assess the difference between these terms.
- Also, if you do improve the property, any improvement must not result in the asset becoming a different asset. The ruling looks at the factors the ATO considers, and what your SMSF auditor needs to consider, when they assess whether a property has been changed to such an extent that it is no longer the same asset.
If a fund falls outside of these rules, the fund must sell the asset. Imagine having to sell a property your fund recently acquired, leaving your fund with the stamp duty, legal and agent’s fees (or perhaps making a loss because the market conditions were not as good as they were when you purchased the property).
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Predictions and realities for the new financial year – What you need to know in 2011/2012
It’s a new financial year and with it comes a series of changes and challenges. The central message for the new financial year is ‘cash is king’ and will remain so for some time to come.
While the economy is performing well, consumers are wary about parting with their cash. Part of the problem is that around 50% of Australia’s growth is coming from 10% of the economy. For the rest of the economy, petrol prices are high, interest rates are likely to rise, and the rate of debt default is at record highs.
Consumer sentiment shows that no one really feels as secure as the headline economic data indicates so discounting and long decision making processes are likely to continue.
For business, take the ‘cash is king’ message to heart. Some very high profile and established businesses have dissolved recently so stick to your trading terms and watch your debtors or you may be caught out by someone else’s problem.
Can your SMSF buy artwork?
Why stop at art? What about collectors items – some fine wine perhaps? Or, a few antiques?
The answer is yes you can, as long as the asset is genuinely for retirement income purposes, not for your personal use now, and not acquired from a related party. But the Government is looking closely at what SMSF’s acquire and how those assets are managed.
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Knowing what assets your Self Managed Superannuation Fund (SMSF) can own is an important part of being a fund trustee. You should also know what assets your fund can acquire from you or related parties.
New rules recently introduced may give more scope for your SMSF to borrow funds to acquire these assets but there are unique rules and guidelines that need to be adhered to.
As the trustees of your SMSF, you need to ensure that all assets held in the fund are consistent with the fund’s investment strategy. That is, as trustee you need to consider issues such as risk and return, diversification of the fund’s assets, liquidity within the fund, and of course, the ability of the fund to discharge liabilities.
Here are the common questions we’re often asked about borrowing in SMSFs:
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Why every person with a SMSF needs a will
Approximately 60% of Australian’s die without a will in place. The average age of people with a will is 82 and the average age of people who die without a will is 62. Apparently, the majority of us believe that we are going to die of extreme old age.
Dying intestate can be complex enough but if you have a Self Managed Superannuation Fund the situation can become even more complex.
Dying without a will in place is likely to mean that there will be a significant period of time before your beneficiaries can access your superannuation – even if you have binding death benefit nominations in place. The reason is that once the trustee dies, there may not be anyone with the legal authority to approve the payment of your superannuation to your nominated beneficiaries. If you are a Director of a trustee company with multiple directors, it will depend on whether the trust deed and the company constitution allow the other directors to act without you.
With many of us building a significant amount of wealth within SMSFs, it’s important that these funds are not unnecessarily tied up when our families most need them.
Click here for more information about how Hayes Knight can assist or speak to your Hayes Knight Adviser today.
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