The ATO Reveals What Attracts Its Attention

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According to the ATO, there are particular behaviours, characteristics and tax concerns that draw its notice.

But because it concentrates more on making sure that taxpayers get things right rather than on the trouble and costs of pursuing every tax offender, the tax office has revealed the incidents or circumstances that are more likely to raise a red flag.

Below are the behaviours and characteristics that may land you in trouble with the ATO:

  • Tax or economic performance is not comparable to similar businesses
  • Low transparency of tax affairs
  • Huge, one-time or odd transactions, including transfer or shifting of wealth
  • A record of aggressive tax planning
  • Tax outcomes that conflict with the objective of tax law
  • Electing not to follow or habitually taking contentious interpretations of the law
  • Standard of living not substantiated by after-tax income
  • Managing private assets as business assets
  • Using business assets for tax-free personal use
  • Poor governance and risk-management systems.

Also, the ATO’s risk antennae is more sensitive to certain matters of taxation, such as CGT, FBT, private company profit extraction (including Div 7A), the taxation of financial arrangements, and more. The use of trust is also included in this list.

Trusts

With trusts, there are a number of compliance issues that draw the ATO’s attention, such as the distributions from discretionary trusts to SMSFs, which “are subject to the non-arm’s length income rules and the amount is treated as non-arm’s length income and taxed at the highest tax rate of 45%”.

The ATO’s pays particular attention to the following details:

  • The complying superannuation fund (generally SMSF) is a beneficiary of a trust.
  • The trust is not a fixed trust (or one with fixed entitlements to income) and is not widely held.
  • Distribution by trust to complying superannuation fund.
  • Superannuation fund does not report amount as non-arm’s length income.

Differences between distributable and taxable income, and distribution to tax-preferred entities

Of particular interest to the ATO is the differences between distributable and taxable income of a trust and its taxable (or net) income, which can be used by individuals getting the monetary benefit of trust distributions to escape paying tax on them.

The setups consist of:

  • The trustee settles on a drastically decreased trust distributable income contrasted against the trust taxable income.
  • The inclusion of a tax concessional beneficiary to receive entitlement to the small trust distributable income along with the huge liability to tax generated from the trust taxable income.

Here are the possible circumstances for the tax concessional beneficiary:

  • Have huge losses in the past year.
  • Have minimal resources that are insufficient to cover the tax liability arising from the distribution.
  • Be assessed at a significantly lower rate (or not at all) than those ultimately getting the monetary benefits through this setup.
  • While these situations may generally be the standard, they are not standard where the trustee directs the trust’s distributable income for this purpose.

Another red-flag to the ATO is distributing mostly to tax-preferred entities. This is a situation where a beneficiary is exempt from tax, in a loss circumstance or is a newly-established company.

Treating income as capital

The ATO also has their eye on trusts that are running a business of divesting an asset as part of an income-generating operation. It is the job of the tax office to make sure these trusts are not claiming the 50% CGT discount on the profits earned by selling an asset, or establishing this as part of a business.

The ATO says: “Inappropriate characterisation as capital can occur where property developers set up special purpose trusts and report any profits from the ultimate sale of the property on capital account in order to claim the 50% CGT discount. These profits should be on revenue account for tax purposes because the property is sold as part of a profit-making undertaking.”

The ATO advises that if you have concerns about a particular tax or super position to (1) seek guidance from the ATO or (2) request a self-amendment or make a voluntary disclosure to correct a mistake.

See a qualified tax advisor, accountant or bookkeeper if you have questions or concerns about tax matters. This will prevent you from making a mistake, or worst drawing the attention of the taxman. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

New Tax and Legal Changes for Businesses Effective 1 July 2016

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Many changes for Australian small and medium businesses come on 1 July each year.

With the new financial year now underway, there are a host of tax and legal changes that SMEs need to know about.

Here are the changes that SMEs need to know about:

Rise in minimum wage

Effective 1 July 2016, the Australian government has increased employees’ minimum wage by 2.4%. Full-time employees can now receive a minimum of $17.70 per hours, or $672.70 weekly, up by about $15 weekly.

It is important for businesses to know about this as all awards must change to mirror the new minimum wage.

Amendments to the country of origin labels

The changes to the country of origin labels also became effective on 1 July 2016. With the changes, consumers will be able to get more information as to the origin of the ingredients in the products they are purchasing. In the past, the information on whether a product was made or grown in Australia is included on product packaging. But now businesses are required to specify on the packaging the smallest proportion of Australian ingredients by percentage.

A good number of businesses in the food sector would already be informed about these changes, but still businesses have been granted a two-year grace to implement the new labels. The new rule would then be mandatory effective 1 July 2018.

Change to the high-income cap for unjust dismissal

Starting 1 July 2016, the high-income limit for unjust dismissal has been upped to $138,900 per year from $136,700. The government has also increased the compensation threshold for unjust dismissal claims from $68,350 to $69,450.
Business owners should also know that unjust dismissal rules now include employees with earnings above $136,700 and below $138,900.

Amendments to SMSF laws for collectables and personal use assets

Self-managed superannuation (SMSF) funds having collectables and personal use assets owned before 1 July 2011 will no longer be exempt effective 1 July 2016. These assets include items such as jewellery, artwork, boats, vehicles and wines.
The ATO now requires that such items be made solely for retirement purposes, not for present-day benefit.

Tax break for people wishing to change business structures

Qualified small businesses will no longer incur capital gains tax liability when they change the legal structure of their business.

The new rules give qualified small businesses access to an optional rollover provision when they hand over an active business asset to another small business entity as part of a real business structure change. But businesses have to be eligible by not changing the “ultimate economic ownership” of the asset.

Four months to prepare for SuperStream

The deadline for small businesses to comply with the ATO’s SuperStream system was originally 30 June 2016. However, the deadline has been extended to 28 October 2016.

Under SuperStream, small business owners are required to pay the super contributions for their employees electronically in a standard data set.

Small businesses that missed the original deadline will not be subjected to any compliance action.

Meet with a qualified tax advisor, accountant or bookkeeper for tax enquiries and to be updated with legal and tax changes. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

Understanding Taxation for Property Investors

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Property investors are aware of the various specialised tax breaks they are entitled to, but are also liable for some taxes that the majority of non-investor property owners are not, including land tax and capital gains tax (CGT).

In this article, we will talk about allowable tax deductions, CGT and purchasing property using a self-managed superannuation fund (SMSF) to help property investors gain more knowledge of their taxation duties.

Maximising deductions

A wide range of rental property deductions can be claimed by property investors, that is, if they keep the correct documentation and invoices.  Here are some of the common expenses that you, as a property investor, can claim in relation to owning a rental property:

  • Advertising for tenants
  • Cleaning expenses
  • Council and water rates
  • Electricity and gas
  • Gardening expenses
  • Insurance (building, contents, etc.)
  • Interest on the investment loan
  • Land tax
  • Real estate management fees
  • Repairs and maintenance
  • Reasonable travel costs (for inspection of property)

You can claim the money you spent on things such as white goods, furniture and air conditioners, but they will still be covered by depreciation. The useful life of the item in question is to be utilised to claim the appropriate deduction over a period of years.

Building, construction and borrowing costs

Though not deductible, you can claim building and construction costs under the special building write-off guidelines. Generally, for a rental property constructed after 15 September 1987, a part of the construction costs that is still unclaimed at the date the property was purchased can be claimed.

You can write off the cost at 2.5% every year over 40 years. However, you have to determine the cost of the construction work and the date it was carried out. You can obtain this information from the previous owner, or you can have an estimate provided by a qualified expert, such as a quantity surveyor. If it is a new property, you can get the appropriate cost information from the builder or a quantity surveyor.

Also considered as allowable tax deductions are loan procurement fees and other borrowing costs. However, you can usually claim them over five years.

Non-deductible

Some expenses cannot be claimed as a deduction, but are allowed to be included as part of the cost base of a property if it is sold, for CGT purposes.

Together with the original purchase price, below are some items you can add to the cost base:

  • Stamp duty on purchase
  • Valuer’s fees on acquisition
  • Legal costs that are incurred on the purchase and sale of the property
  • Advertising expenses on sale
  • Auctioneer’s fee
  • Capital expenditure on improvements that escalate or maintain the asset’s value (e.g. building a new garage)

Deduction tips for property investors

When negatively gearing, you may want to get an interest-only loan for your rental home because this type of loan guarantees that interest expenses are kept at high levels while not decreasing the loan’s principal. This can benefit you as it will let you offset the interest against your total taxable income. But the decision to take this loan should be determined by your financial situation at the moment and in the future.

If you travel to your property to manage it, you may deduct the travel costs while checking out the property. This would only include, for example, the costs of airline tickets to inspect the property one day and going back home the next day. If you travel to you property and stay for a week-long holiday, tax rules will require you to allocate expenses between deductible and non-deductible items.

CGT and investment property

You need to remember that an investment property that was used in the past as your primary residence can still be considered as primary residence and thus remain CGT exempt for a maximum of six years after the house has ceased to be your family home, as long as you do not own any other primary residence.

Sale of investment property and CGT

You may have to pay CGT for selling a rental property, provided that asset was purchased on or after 19 September 1985.

There will be a capital gain from selling the property when the proceeds from the transaction are higher than the cost base of the property. You will incur a capital loss if the proceeds are lower than the cost base.

If there is a capital gain, you have to apply any capital losses from the present or past year. You may further reduce any remaining net capital gain by using the 50% CGT discount for individuals who have had the home for over 12 months. If the home has been owned for less than a year, the 50% CGT discount can’t be claimed and thus the entire net gain is treated as income and is taxable.

To help pay a possible large CGT tax, always put aside part of the sale proceeds from your rental property.

The effect of building depreciation claims on the cost base of a property

Capital works deductions may decrease the property’s cost base for CGT purposes, if such deductions have been claimed in relation to a rental property. Any depreciable buildings sold with property are subject to special rules.

Investing in property through SMSF

It is not recommended that an SMSF be set up for the simple reason of wanting to invest in property without properly weighing all the risks, benefits and related expenses involved.

Because of the high cost of property, the SMSF may be heavily invested in one type of asset. In this case, it is the duty of the SMSF trustees to consider diversification as one of their investment strategies. If one type of asset underperforms, you can limit your risks with diversification.

There are several tax benefits from investing in property using an SMSF. First, you can claim a 15% maximum tax rate on net rental income when the SMSF is in accumulation mode and 0% while full pension mode. In addition, if the property is sold after being owned for over 12 months, any consequent capital gain will be subject to a maximum capital gains rate of 10% or 0% if in pension mode.

For any deductions for losses or expenses for a rental property acquired using an SMSF, the rate is a maximum of 15%.

For most investors, it may be more beneficial tax-wise to buy a rental property using other structures or under their own names rather than through an SMSF.

Common pitfalls to watch out for

It is common for investors to group different properties under one loan umbrella. For instance, one mortgage may have been taken to finance both the home and the rental property. In this situation, ensure that the loan is structured so that will make it easy for you (and the ATO in the event you’re audited) to identify what part of the loan is for the rental property. After this, you can identify which part of the interest you can claim as an outgoing against your rental income.

You also have to remember that you’re not entitled to a deduction for interest you pay or for any outgoing you gain after the property is no longer being rented, or the part of the loan utilised for private reasons.

Determine all qualified outgoings to be made part of the cost base of the property, because it could potentially cut down any capital gain and raise any capital loss that can be passed on indefinitely to be used against any capital gains incurred in the future.

PJS Accountants offer expertise in managing your tax affairs with a complete range of compliance, corporate and individual tax services. We serve large companies, SMEs, family businesses and individuals. The ever-changing tax laws and requirements could put businesses and individuals at risk. Putting nothing to chance! If you need tax advice or guidance, contact PJS Accountants.

Using your Self Managed Superannuation (SMSF) to Buy Property

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Purchasing property using SMSF is becoming widespread. However, careful consideration is required before you decide to do this.

Make sure that it fits perfectly with your general investment strategy to prevent needless risk.

Property Purchases in SMSF 101

Properties purchased through super have become popular as a result of the Limited Recourse Borrowing Arrangements (LRBA).

Super funds are allowed to buy an asset, or a group of similar assets with identical market value, using borrowed monies. The beneficial interest in the assets purchased is received by the SMSF trustees. However, the holding trust has the legal ownership of the asset.

The good thing is your entire super fund is protected under LRBA in case the loan is defaulted. The manner that a debtor can recoup their funds is also restricted. Ask yourself these questions before proceeding:

  • What type of property should you buy if you use your SMSF?
  • What is your option if you don’t have a super fund?
  • What benefits would you derive from creating an SMSF to buy property?

The upsides

Owning a property in an SMSF offers many advantages. 15% tax will be deducted from your super fund on earnings, a rate that is significantly lower that majority of individuals’ personal tax rate.

The capital gains tax is computed at a reduced rate if the asset is divested during the accumulation phase. If the property is divested when the super fund is in pension phase, it is not taxed at all.

But before you start on establishing an SMSF specifically to purchase property, residential or commercial, you have to take note of some important things.

Buying a home in an SMSF

The first you should know is buying a residential property for you to live in, or a relative to live in, is not allowed.

There is a rule that the trustee of the fund, its members, or any family members, cannot benefit from the asset.

The only purpose of buying an asset is to support the fund’s investment strategy in growing wealth for retirement.

Is your super short of funds?

If you are considering purchasing a house but your SMSF does not have sufficient savings, or you prefer not to use an LRBA, another option is available to you.

In a Tenant in Common (TIC) process, you can divide the borrowing across your super fund and your family home.

For instance, if the price of the asset you want is $400,000, you are allowed to loan $200,000 against you family home and use $200,000 from your super fund under TIC.

Buying a commercial property in an SMSF

Usually, people utilise their super fund to purchase a commercial property to be rented back via their business. You have to be aware of a few specific conditions if you are considering this:

  1. No rental holiday: You can’t skip the rent when the market is down. You have to pay rent on time, all the time, in full.
  2. Commercially competitive: You have to be sure that the terms of the lease are commercially competitive. Leasing it back for “mates’ rates” to benefit financially is not permitted. SMSFs are regularly monitored and audited by the ATO to make sure all arrangements are compliant?
  3. Sole purpose test: The ‘sole purpose’ test must be passed by the investment. This purpose is to offer retirement benefit to the SMSF’s members.
  4. Valuations: The super fund’s compliance depends on routine valuations being conducted on the asset. This requires time and involves plenty of paperwork to accomplish.

Still going through with it?

In the end, the test decision to purchase an asset in an SMSF should be made rationally using facts and sound advice.

Ask these questions about your potential investment:

  • Is the asset deemed a good investment?
  • Will its value increase?
  • What risks should I anticipate?
  • What is the income?

To help you make a sound decision, hire a qualified, independent third party to review the potential investment and give you their honest opinion. You may not be able to get good advice from a person who would benefit from selling the property.

If you are considering buying a property, whether commercial or residential, using your SMSF, meet with one of our tax experts to guide you through the process. If you want to know more about super funds and how to use it to purchase asset, contact PJS Accountants.

The Deadline for Superstream is Looming!

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Superstream will become mandatory by 30 June 2016, and employers are being advised to get it ready before the deadline.

You need a little time to set it up, but more than a quarter of business owners who have transitioned to Superstream have seen the time they spend on super decline, by 70% on average. That is equal to about 1.5 hours every cycle! If you have yet to make the change, here are the options to get Superstream ready:

  • Change your existing payroll system to a higher version
  • Utilise the online system of your superfund
  • Utilise a messaging portal
  • Utilise a clearing house (such as the free Small business superannuation clearing house provided by the ATO if less than 20 employees)

Your accountant or bookkeeper can also help guide you through the process.

Collecting your workers’ TFNs and their funds’ unique super identities (USIs) is an integral part of preparing for Superstream. The information can be inputted in your system before 28 January, the next quarterly due date. Use the time to make sure things are running without a hitch.

Here’s the ATO’s Employer Checklist to guide you on the process step by step.

PJS Accountants offer expertise in SMSF. We assist clients in setting up SMSF and we guide them in the right direction relating to matters such as contributions and rollovers, pay benefits, investing, winding up, and subsequent management and reporting to ascertain compliance. For enquiries, contact PJS Accountants.

The Reasons Why Self Managed Super Funds are Popular

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Planning for the future is increasingly becoming more important given the present economic conditions. The ageing population in Australia is expanding, and life expectancy is becoming longer which compels us to be forwarding thinking and make practical investments. When individuals begin working, they begin contemplating participating in a superannuation fund. This has brought the spotlight on the rising popularity of Self-Managed Superannuation as another option aside from retail or industry funds.

Why is Self-Managed Superannuation so popular? There are many reasons why, but there are a few that stand out, including:

  • Superannuation gives a sense of self-empowerment. There are various positive benefits to being in control of your own retirement fund. It gives you the power to choose which investment to purchase, particularly with real estate, and to take out a loan (gear) for asset acquisition.
  • Do you own a small business? If you are an owner of a commercial property purchased in your super fund, your business can lease the property and you earn rental income for yourself in the process. This has the extra benefit of constantly having an excellent renter!
  • SMSF can be cost-effective, depending on the fund’s balance. The management expenses, like accounting charges of SMSF, don’t automatically go up with the value of the fund. In comparison, the management expenses of the majority of retail and industry funds increase according to a percentage of fund balance.

You can save for your retirement through SMSF. It is very vital that they are established correctly and conform to law. The Australian Taxation Office recommends considering professional advice when establishing or managing a SMSF.

Things like determining your fund’s structure and guaranteeing the stress-free management of your fund are just two reasons why getting professional help is helpful in maximising the fund members’ interests and in guaranteeing conformity to the laws that apply to SMSFs.

PJS Accountants work with clients to give professional SMSF advice. We offer assistance in setting up SMSF and we guide you in the right direction relating to matters such as contributions and rollovers, pay benefits, investing, winding up, and subsequent management and reporting to ascertain compliance. For more information, contact PJS Accountants.

The Top Eight Myths about SMSFs that you Should Know

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Here are the eight biggest untruths that you might have read or heard with regards to creating and/or running a self-managed super fund:

Myth #1 The Policies are Never Consistent.

You’ve probably heard that one of the disadvantages of owning a SMSF is that you have to be vigilant because the rules and regulations are always changing. While it is true that it is more complex than a retail fund (which can be set up and forgotten), amendments to the regulations are limited, and if you have hired an accountant or a financial advisor they will make sure you are up to date with the latest requirements.

Myth #2 SMSF is very complicated.

If you are considering having a SMSF to reap its various rewards and benefits but don’t have the time to manage it, bring in an accountant or financial advisor to do the task for you.

Myth #3 The performance of superannuation as an investment is below expectations.

Contrary to popular belief, superannuation is a structure for starting an investment, not an investment. If your superannuation is not as performing as well as you’ve expected, then it’s due to the fact the investments you’ve chosen are not performing well. Regardless of whether those investments were arranged as superannuation or via another structure, their performance would be exactly the same – (not good).

Myth #4 Having a SMSF costs more.

A number of factors influence this, including the number and type of assets you own, your fund balance, and the investment structure you picked. Talk to a financial advisor or an SMSF specialist to know whether SMSF is the right investment option for you.

Myth #5 You lack control over your SMSF.

You have major control if your super is invested in an SMSF. But even if you are participating in a retail super fund, there is a level of control with various investment types.

Myth #6 You don’t have to be concerned about your superannuation until you are older.

Like other investments, you increase your chances of reaching your ultimate goal if you invest longer. Begin planning in advance so you gain the flexibility to go after higher-risk strategies and the time to regain any possible losses.

Myth #7 You can do SMSF alone.

Even if you are not a member of an industry fund, it is wise not go at it alone when you open an SMSF. You need the help, the skill and the expertise of a financial advisor to guide you in the right investment strategy, and an accountant to make sure you are on top of the rules and regulations and that you’re getting great tax results.

Myth #8 You can extend your risk further and diversity your investments better with a super fund.

This depends. A large number of super funds own a big part of the fund invested in the share market. A SMSF lets you sell your shares if stock market declines are forecasted. In contrast, with a retail super fund this decision is someone else’s to make (eg. the trustee).

PJS Accountants works with clients to open and manage a SMSF. Contact PJS Accountants if you’d like to talk to us about your retirement goals and help you decide whether a SMSF is the best investment strategy for you.

Important Things to Know About Superannuation for New Business Owners

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It is not easy running a new business. There are all sorts of legal requirements to understand. In addition, a new employer must know their responsibilities with regards to wages, benefits, and superannuation, which is one of the major payments to employees.

New business owners may find it overwhelming trying to understand superannuation. In reality, however, it is easier than we believe. All you need to do is become familiar with a few major concepts:

Maintain Detailed Records

Enter information pertaining to the super funds to which you are paying contributions, the sum you paid, the date of payment and what period is covered by the amount paid.

Choosing a Super Fund

Can workers choose which super fund they would like to join? There are awards and agreements in which the choice of the super fund is not up to the employees.

Business owners are required to present a standard choice form to qualified workers who prefer to pick their own super fund. Consult the ATO website for more information on standard choice forms.

Getting to Know SuperStream

Beginning 1 July 2015, businesses are required to comply with a new policy called SuperStream. It is designed to simplify the process of reporting superannuation contributions to the government, saving business owners plenty of time.

The Superannuation Rate

Several changes in the superannuation rate have been witnessed over the last several years. Here are the essential things to remember:

  • 1 July 2015: 9.5%
  • 1 July 2021: 10%
  • 1 July 2023: 11%
  • 1 July 2024: 11.5%
  • 1 July 2025: 12%

When are Super Payment Due?

Employees have to pay super fees to their employers every quarter. Following are the due dates for each quarter:

  • Quarter 1, 1 July – 30 September: Due 28 October
  • Quarter 2, 1 October – 31 December: Due 28 January
  • Quarter 3, 1 January – 31 March: Due 28 April
  • Quarter 4, 1 April – 30 June: Due 28 July

If you want to learn more, there are plenty of resources online including government websites. If you are just starting a business and know little about superannuation, meet with one of our experts who can guide you through the process. If you want to know more about super and your obligations as an employer, contact PJS Accountants.

Excess Non-Concessional Superannuation Contributions Gets a Fairer Tax Treatment

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A legislation to amend the treatment of surplus non-concessional superannuation contributions has recently been passed by the Government. Under the new measures, the double taxation on after tax contributions put into superannuation over the maximum limit (presently at $180,000 annually) has been removed. This affects any surplus non-concessional contributions made beginning 1 July 2013.

The old system required that non-concessional contributions made in excess of the cap be taxed at the highest marginal tax rate. This had caused small, unintended violations leading in unevenly high tax assessments and people essentially paying taxes two times.

Under the new system, new members who violate the caps get an option to have the surplus non-concessional contribution and a related earnings amount (computed by the ATO) withdrawn from their superannuation and the payment returned to them. The related earnings will be added in the person’s personal assessable income and general interest charges will also apply. If the person doesn’t take up the option to withdraw the excess, then the highest marginal tax rate will be applied to the amount.

There will be some charge if the contribution caps are topped, but members are now given an option. There will no longer be an automatic penalty applied to minor violations, thus giving more peace of mind to individuals using contribution plans to make the most out of their retirement benefits.

If you need any help in finalising your year to date superannuation contributions, please talk to one of our team members at PJS Accountants.

Important Things to Know About SMSF Property Issues

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Real residential property makes up 3.5% of the value of all assets maintained in SMSF’s according to the latest SMSF figures from the Australian Taxation Office (ATO). This has been the level of investment since 2009, with a high proportion of properties valued between $200,000 and $1 million. Commercial property represents about 12% of SMSF investment. However, there has been a change in the number of investors, with an average 1,200 new investors utilising their SMSFs to buy residential property annually. And, the limited recourse borrowing arrangements have soared by 1758% between June 2009 and June 2014.

However, many SMSFs face some very massive risks if the borrowing arrangements and property purchases are not set up properly. If there is a breach in compliance requirements, your SMSF is in danger of being charged with non-compliance and may lose concessional tax status. In addition, the trustee may also be penalised under ATO’s new penalty authority that became effective on 1 July 2014.

Is Buying Property with your SMSF Right for you?

Liquidity, diversification and cash flow. Under the Superannuation Industry (Supervision) Act (SIS Act), trustees are required to watch out for these three elements when investing. For SMSF investment in real property, there may be issues if trustees place the fund’s entire “investment eggs” in one basket. If this is the case, the return will be inadequate to meet the fund’s commitments.

When in pension phase the fund has to meet the minimum requirements for pension drawdown. There is an issue of whether the rental yield can meet the fund’s current expenses including pension payments. Money is needed to raise the minimum pension drawdown through the years: 4% at age 64 and 6% at age 75. The number is up 50% in drawdown commitments. Will rent jump by 50% to keep up with payments.

However, what happens if a member prefers a lump sum over a pension? Where can the fund get the money? What happens upon the death of a member? How would the fund pay out the benefits? It would be a challenge as selling one part of the investment property is not permitted.

Can My Investment Property Be Purchased by my SMSF?

A typical question that is frequently asked is, can I use my SMSF to purchase a residential rental home, holiday home, or house from me or a relative of mine? The answer is you can’t, except if the property is a business real property, or a property utilised fully and solely for business. And, more often than not, a residential property will fail to meet the criteria to be a business real property. Don’t forget that the penalty for violating the related property investment law is imprisonment of a maximum of 12 months.

Upgrading a Property

If your SMSF used loaned money to acquire property, it is barred from using any portion of the loan to upgrade that property. In addition, an SMSF is not allowed to borrow money to fix a property that it owns.

But an SMSF can utilise its own funds to upgrade or fix a property bought with borrowings, provided the upgrades do not turn the property into a different property. For instance, a residential property cannot be converted into a children’s centre. Or, develop a vacant land into an investment property.

Consider a SMSF that takes out a loan to purchase a residential home on a big block of land ready for development. It is not legal for the fund to subdivide the lot and construct a new house as the borrowing policies do not allow a modification in the character of a property purchased using borrowed money pending the termination of the loan.

Committing Mistakes on Important Matters

SMSF Trustees often commit simple mistakes as a result of rushing the moment or just bad structuring.

Here’s the most noticeable example: putting the names of the members when a property is bought by the fund. There are times people get excited and proceed with the transaction without carefully considering the details. Or, when a related entity is involved, like a unit trust, but the unit trust was not created prior to the acquisition of the asset or the wrong name is typed into the contract or filed with the titles office.

Are you considering investing in a self-managed super fund (SMSF)? There are strict laws that govern the management of SMSF. PJS Accountants can help you determine if it is the right investment option for you. For enquiries about SMSF and how we can help you start a good investment strategy, contact PJS Accountants.