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Beware SMSF schemes: residential property purchase

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The ATO has warned taxpayers against entering into a scheme through their self managed superannuation fund (SMSF) which claims to allow individuals to purchase property using money from their super. In terms of this particular scheme, the ATO will apply a “look through” approach to consider any arrangements entered into as a whole, which means if an SMSF’s fund money is used to help purchase a property for a member, whether it be indirectly through the SMSF’s investment in other entities, it will be treated as an illegal early access of super benefits by the member.

This sort of scheme typically involves the rollover of a member’s super benefits from an existing fund into a new or existing SMSF, which then invests in a property trust for a fixed period and rate of return, being a contributory fund with other investors. However, the money from the property trust is then on-lent to individuals from a third-party in the form of a loan to assist in the purchase of real property secured by mortgages over the property. 

Depending on the type of scheme, the money on-lent to the individual may be used for all or part of the deposit, the balance of the purchase price, costs relating to the purchase, or even to help consolidate a member’s personal debts to enable them to secure a home loan. The scheme promoter will usually charge a high fee to the fund and establish both the SMSF and the property investment, as well as organising the purchase of the property (in some cases house and land packages). 

While the ATO notes that these arrangements are established and promoted under the guise of a genuine SMSF investment with the added benefit of helping individuals purchase a home, they are not in fact legitimate investments and often contravene one or more of the super laws by providing members with a current day benefit while also being set up in ways that don’t comply with the sole purpose test.

As a quick recap, the “sole purpose test” means that the SMSF needs to be maintained for the sole purpose of providing retirement benefits to members, or to their dependants if a member dies before retirement. Failing to meet the sole purpose tests results in the fund losing its concessional tax treatment and trustees potentially facing civil and/or criminal penalties. 

In terms of this particular sort of scheme, the ATO noted that a “look through” approach will be applied to consider any arrangements entered into as a whole. That means if an SMSF’s fund money is used to help purchase a property for a member, whether it be indirectly through the SMSF’s investment in other entities, it will be treated as an illegal early access of super benefits by the member. The amount of illegal early access (ie the amount used the help purchase a property) will be included in the member’s assessable income and taxed at their marginal rate. Tax shortfall penalties may also apply to the amount released. 

Individuals who may have been persuaded by slick marketing or promoters and inadvertently entered into these schemes are urged to contact the ATO to make a voluntary disclosure. The ATO notes that voluntary disclosures will be taken into account when determining any penalties which may apply and what actions will need to be taken. 

Source: www.ato.gov.au/General/Tax-planning/Schemes-targeting-SMSFs/Residential-property-purchased-through-illegal-SMSF-schemes/