Investing in properties in partnership with others via your SMSF can be a great way of getting property in your fund.
However, there are many strict rules and requirements in terms of the day-to-day management and paperwork that you will need to be aware of – to ensure that your fund doesn’t end up breaching the super rules.
Although it is always best to invest in property via your SMSF on a standalone basis, some clients just simply can’t afford to do this.
With house prices escalating, and the increased difficulty of finding a commercial property with a decent return, trustees are now more than ever looking for new ways to invest in property.
Investing in partnership with others can be a way that you can get the property into your fund, without having to fork out the entire purchase price on your own.
An SMSF can acquire both residential and commercial property in partnership with others. However, to ensure that the structure remains compliant, trustees must ensure that the partnership books are operated as if the SMSF is investing in the partnership on its own.
Essentially, the proportion of ownership must be carried through the books of the partnership at all times. The SMSF is entitled to its share of the partnership profits (i.e. rent) and must pay for its share of the partnership expenses (i.e. property outgoings including rates, water and sewage, body corporate and land tax).
If an SMSF enters into a partnership arrangement with other individuals, they effectively become associates of the super fund, and therefore the in-house asset rules may apply.
Compliance issues may arise in the following situations:
- Financial assistance –
The property can only be rented to a third party if it is residential in nature. Commercial premises may be rented to a related party. However, there should be a lease arrangement, the rent must be at an arm’s length transaction, and the rental arrangement must be conducted strictly in accordance with the lease. Rent must be paid on-time and in-full to avoid a potential arm’s length breach.
- Overdrafts in bank accounts –
The partnership should have a separate bank account and this bank account should never go into overdraft. If an overdraft occurs, the fund would have breached section 67 of the SIS Act. The fund auditor will typically request a copy of the bank statements for the partnership along with the partnership financials annually.
- Separation of assets –
The SMSF must keep all assets and money separate from any assets and money held by the members and trustees personally. As such, any investment in a partnership, that involves property and bank accounts, should all be held in the name of all the partners, including the fund. If a title search is obtained, then the fund name should appear as the owner on the property title.
- Arm’s length dealings –
The fund should have the correct share of partnership income physically paid across to its bank account to pay for the correct share of partnership expenses. Failure to do this on a will result in a breach of the arm’s length rules contained in the SIS Act.
If there are unpaid profits, then this could be considered a loan back to the partnership. This will also result in a reportable breach if it exceeds the in-house asset limit of 5%.
Owning a property in a partnership will lead to additional audit requirements. It is recommended that regular accounts are maintained, in order to ensure that the partners are receiving their share of the partnership profits on an ongoing basis.
We can assist you with setting up this structure. If you are interested and would like more information, contact us on 07 3394 4611 to discuss your options.