A holistic approach to SMSF property compliance

Property investment within SMSFs remains a popular strategy for building retirement wealth. Compliance in this area, however, requires a holistic approach to ensure that SMSFs operate within the legal framework administered by the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC).

One of the problems is that SMSF trustees investing in property do not appreciate how the Superannuation industry (Supervision) Act 1993 (SIS Act) and the Superannuation Industry (Supervision) Regulations 1994 (SISR) interact.

Areas that can cause the most concern are the sole purpose test, the non-arm's length income (NALI) provisions, market value implications and property development.

The sole purpose test

The sole purpose test lies at the heath of a complying SMSF as outlined in section 62 of the SIS Act. It mandates that an SMSF must be maintained solely to provide retirement benefits to its members or their dependents in the event of a member's death.

Until then, SMSF assets must not be misused for personal or business purposes unrelated to retirement benefits. Breaches of the sole purpose test can have severe repercussions because an SMSF can risk losing its complying status and be subject to higher taxation rates.

Non-compliance may arise from various scenarios, such as:

• occupying residential property by a related party for personal purposes
• undertaking property development activities where transactions are not at arm's length
• leasing business real property at market rates if used by related parties.

Where the trustees of an SMSF are involved in property development ventures in various capacities, they must demonstrate that their decision-making is solely pursuing the retirement purpose of the SMSF and is not influenced by other goals or objectives concerning those business or other entities.