So when it comes to investments, what are the important rules to keep in mind, and what are the triggers that show you should seek advice?
First, work out who or what owns the asset at the moment (the person, company, trust or other entity from whom the SMSF will buy it). There are strict rules about buying assets from related parties and generally the only things that are allowed are listed shares, managed funds and business property. Related parties are people like the fund’s members, relatives, partners and even entities like companies and trusts that the members and people close to them control. Any SMSF buying any asset from a person or entity that is connected to them in some way almost certainly needs advice before going ahead.
If the asset is something like property that will be leased to someone, also check who or what (person, company, trust or other entity) that will be. There are rules and limits about what kinds of assets can be leased to related parties, particularly if they represent a large proportion of the fund’s assets.
Make sure the whole transaction is completely arm’s length no matter who is involved – the fund needs to pay a market price for the asset and if it’s then leased to someone else that arrangement needs to be commercial too. Even with fairly mainstream investments like commercial property, getting this wrong can be disastrous. Ensure the rent is at market rates, is paid on time and is increased in line with normal market terms. Make sure it’s clear who is responsible for repairs and other costs and that they are paid by the right party (or reimbursed quickly if someone gets it wrong).
If the deal between the fund and the tenant is too generous to the fund, there’s a risk that the income from the asset and any profits (capital gains) made when it’s sold will get a special classification known as “non arm’s length income” and be taxed at 45 per cent rather than the usual superannuation rates.
If the deal is too generous to the other party (ie, someone from whom the fund is buying the asset or someone to whom it is being leased), the Australian Taxation Office will check closely to see if the SMSF members are secretly trying to get money out of the fund before they are allowed to or are providing financial support to family members. Both are illegal.