SMSF investors still making basic mistakes on property purchases as ATO cracks down on super ‘cheats’

Investors who borrow through their self-managed super funds to acquire property continue to breach the rules and risk being reported to the Tax Office, warns Heather Gray, a partner at law firm DLA Piper.

Her warning comes as the ATO revealed in its third-quarter update (to March 31) that it had prosecuted of more than 1,500 people for tax and superannuation offences, sending “a clear warning to tax cheats that they can expect to be caught”. 

Properties acquired by a SMSF using limited-recourse borrowing rules have to be acquired via a separate trustee with a custodian holding the legal title.

“Clients still get this wrong all the time,” said Gray at the Institute of Chartered Accountants in Australia’s Business Forum 2012.

“They will ring you (their financial advisor) on a Monday morning all excited saying they have found a great property over the weekend for their super fund.

“They will tell you they have signed a contract and want to sit down to discuss how they will structure the investment in their fund,” says Gray.

But, she says, invariably the custodian has not signed the contract.

“In fact the client has not even thought about the custodian; it’s not even a twinkle in their eye as yet.”

“And they have paid the deposit, who knows from where – probably from some random banking account,” Gray says – not from the fund.

Such basic mistakes can result in investors breaching SMSF borrowing rules and being reported to the ATO.

“It is the super fund buying the property and the super fund that must provide the money,” explains Gray.

Furthermore it is the custodian, which holds the legal title, and it must be the one that signs the contract of sale.

Tax Commissioner Michael D'Ascenzo says the March quarter ATO prosecution figures show that there are “significant risks and consequences for people who do not properly fulfil their legal and civic responsibilities in relation to tax and superannuation”.

"The year-to-date results to 31 March reveal that the ATO successfully prosecuted 1,106 individuals and 400 companies for tax and superannuation offences," he says.

“We have a range of measures in place to ensure we detect and deal with those who evade their obligations. This includes information sharing and working with other government agencies, and also with overseas counterparts.

"The ATO pursues tax cheats to the full extent of the law to ensure honest taxpayers have their interests looked after. Australians don't want to face an unfair burden when dishonest people avoid their tax obligations, and they expect the ATO to provide a level playing field,” says D’Ascenzo.

Last week the ATO finalising guidelines for what constitutes a single acquirable asset under limited recourse borrowing rules and clarifying what renovations and repairs are allowed to be carried out on properties acquired through super.