Australian Tax Office joins ASIC by warning SMSF trustees on illegal property investment arrangements

The Australian Tax Office (ATO) is warning trustees of self-managed superannuation funds (SMSFs) to be cautious when investing in property.

Its warned arrangements that are “deliberately entered into to get around the law” can result in the fund's trustees being disqualified, facing civil penalties and even criminal charges.

The ATO has also joined ASIC by warning of those individuals and companies promoting property investments to SMSF trustees.

Last week ASIC revealed to The Australian that it is undertaking “limited surveillance” of financial advisers and accountants over concerns that property spruikers are encouraging investors to set up self-managed super funds purely as vehicles for "dodgy" property investments.

Acting tax commissioner Bruce Quigley says he is concerned people are using their SMSF to invest in property without fully understanding their obligations under the law or some people are seeking to take advantage of certain types of arrangements.

 "We have observed that some arrangements are deliberately entered into to get around the law, which can result in the fund's trustees being disqualified, facing civil penalties or even facing criminal charges.

“Those marketing properties to SMSF trustees as part of such arrangements could be referred to ASIC,” he says.

Quigley says investing in property can be a confusing area for some people.

"The fine details are important and trustees need to be sure that property is the right investment for their SMSF and that the arrangement is legal,"

"We have also seen instances where holding trusts have not even been established at the time the contracts to acquire are signed.

“In other instances the title of the property is held in the individual's name rather than the trustee of the holding trust. Another common mistake is gearing in a related unit trust, which is not allowed under the law," he says.

"Some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified. The only option may be to unwind the arrangement which could involve forced sale of assets at an inconvenient time. This could be very expensive for the fund with potential stamp duty and tax consequences."

"I urge trustees to get reliable, independent advice when making investment decisions and to obtain advice from us if they are contemplating entering into these sorts of arrangements. The responsibility for ensuring their SMSF complies with the law rests with them," says Quigley.