How new rules will affect SMSF property investments
The growth of self-managed super funds (SMSFs) continues its upward path. The investment by the sector in property is also on the rise. But with that comes a need for SMSFs to be acutely aware of the rules that surround investing in property.
Acquisitions of assets, including property, by SMSFs from related parties has its own set of rules and those rules will be altered if legislation introduced in Federal Parliament last week is passed.
The legislation would amend the superannuation laws to prescribe requirements for acquisitions and disposals of certain assets between SMSFs and related parties from July 1, 2013. Related parties can be members of the fund, or a relative of a fund member.
The amendments are designed to implement the government's Stronger Super reforms in response to the Cooper Review recommendation that acquisitions and disposals of assets between related parties and SMSFs should be conducted through an underlying market where one exists. If no market exists, the Cooper Review recommended that the transaction should be supported by a valuation from a suitably qualified independent valuer.
New provisions would prohibit a trustee of an SMSF from acquiring an asset from a related party, subject to certain exceptions. The key exceptions will apply if:
- the asset is a "listed security" (e.g. a share, unit in a unit trust, bond, debenture, right or option listed on an approved stock exchange) acquired in a way prescribed by regulations (these are yet to be released);
- the asset is "business real property" of the related party, and the acquisition of the asset is at market value, as determined by a qualified independent valuer;
- the asset constitutes an investment in certain in-house assets acquired at market value as determined by a qualified independent valuer and would not result in the level of in-house assets of the fund exceeding 5%; or
- the asset is acquired solely as a result of a change to the trustees of an SMSF.
Currently, SMSF trustees can acquire listed securities from a related party provided they are acquired at market value. The method by which these transactions have traditionally been effected has been dependent on the rules of the market the securities are traded on. The Cooper Review found that off-market transactions outside a formal market lack transparency and could be used to manipulate transaction dates and asset values to illegitimately benefit the SMSF or a related party.
The proposed new laws would mean that it will only be possible for an SMSF to acquire listed securities from a related party where the conditions prescribed in the regulations are satisfied from July 1, 2013. Until the regulations are released, it remains unclear whether the regulations will prescribe an off-market method to enable an SMSF to acquire a listed security from a related party, or whether such transactions must only be conducted on-market from July 1, 2013.
The proposed amendments would provide that to acquire business real property from a related party, an SMSF trustee will be required to obtain a market valuation from a "qualified independent valuer". That means the cost of acquiring such property would increase due to the need to get a valuation.
The Bill does not propose to define a "qualified independent valuer". However, it seems that a valuer may be qualified either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community.
This may be demonstrated by being a current member of a relevant professional body or trade association. The valuer must also be independent. Also, the valuer cannot be a member of the fund or a related party of the fund. They should be impartial, unbiased and not be influenced or appear to be influenced by others.
The proposed new laws would also prohibit a trustee of an SMSF from disposing of an asset to a related party, subject to certain exceptions. These rules would effectively mirror the rules applying to acquisitions of assets. The key exceptions will apply if:
- the asset is a "listed security" disposed of in a way prescribed by regulations (yet to be released);
- the asset is not a listed security and is disposed of for market value, as determined by a qualified independent valuer;
- the asset is a collectable and personal use asset covered by regulations in force for the immediately before July 1, 2013; or
- the asset is disposed of solely as a result of a change to the trustees of an SMSF.
A word of warning: The penalties for breaching the new rules are severe.
A trustee who contravenes the proposed new acquisition and disposal rules will be liable to an ATO administrative penalty of $10,200 (i.e. 60 penalty units) for each contravention. The new rules will also be civil penalty provisions carrying civil and criminal consequences.
As such, the Tax Office may seek a civil penalty order of up to $340,000 (or up to five years imprisonment for certain offences involving fraud or dishonesty).
The legislation would prohibit trustees from entering into a "scheme" in relation to acquisitions and disposals of assets by SMSFs to circumvent the application of the new rules.
The amendments, when (and if) passed, will commence on July 1, 2013. The Bill will be debated by Parliament in the coming weeks.
SMEs that have self-managed super funds should become familiar with the new rules, or at least ask their adviser to explain what they mean for them.
Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.