SMSF property schemes and illegal early access warnings
With the ongoing rise in Australian house prices, many prospective home buyers are exploring alternative ways to enter the property market. One arrangement that has recently gained attention involves the use of self-managed super funds (SMSFs). This type of scheme has caught the attention of the ATO, which has classified it as an illegal early release of superannuation benefits.
How the scheme typically works
These arrangements usually involve a member rolling their super benefits from an existing fund into a new or existing SMSF. The SMSF then invests in a property trust for a fixed period and at a fixed rate of return, alongside other investors. While this appears to be a legitimate investment on the surface, the funds from the property trust are then on-lent to individuals through a third party.
The loan is often used to assist with the purchase of real property and may cover:
-
all or part of a property deposit
-
the balance of the purchase price
-
costs associated with purchasing the property
-
consolidation of personal debts to help secure a home loan
The loan is usually secured by a mortgage over the property being purchased.
Role of promoters and associated costs
The ATO notes that scheme promoters often charge high fees to the SMSF. These promoters typically:
-
establish the SMSF
-
set up the property investment structure
-
organise the property purchase, sometimes through house and land packages
The arrangement is usually marketed as a compliant SMSF investment that also helps individuals buy a home.
Why the ATO considers these schemes illegal
Despite how they are promoted, the ATO considers these arrangements to be non-compliant with superannuation law. They often breach one or more provisions, particularly by providing members with a present-day benefit.
Sole purpose test breaches
SMSFs must satisfy the sole purpose test. This requires the fund to be maintained solely to provide retirement benefits to members, or death benefits to dependants if a member dies before retirement.
Where SMSF money is used, directly or indirectly, to help a member purchase a personal property, the sole purpose test is not met. As a result:
-
the fund may lose its concessional tax treatment
-
trustees may face civil and or criminal penalties
ATO look-through approach
The ATO has confirmed it will apply a look-through approach when reviewing these arrangements. This means it will consider the entire structure and all related transactions together.
If SMSF funds are used to help a member acquire a property, even indirectly through investments in other entities, the ATO will treat this as illegal early access to superannuation.
Tax consequences for members
Where illegal early access occurs:
-
the amount used to assist with the property purchase will be included in the member’s assessable income
-
the amount will be taxed at the member’s marginal tax rate
-
tax shortfall penalties may also apply
What to do if you are involved in one of these schemes
Individuals who have entered into these arrangements, particularly those persuaded by aggressive marketing or promoters, are encouraged to contact the ATO as soon as possible.
The ATO has indicated that voluntary disclosures will be taken into account when:
-
determining penalties
-
deciding what corrective actions are required
Early engagement may significantly reduce the severity of consequences compared to waiting for ATO compliance action.
Speak to one of our accountants if you have any questions about the changes in tax for 2023.
