The Australian Taxation Office (ATO) imposes strict regulations when it comes to SMSF properties, even for trustees who have entered retirement. Any breach in the rules could lead to fines and taxes.
Before moving into an SMSF property, determine first if it is legally permitted.
Question: Can a trustee who owns a property purchased through an SMSF reside in it upon retirement?
The answer depends on several factors, but it’s best to wait until a legal document proves that the arrangement is allowed in order to avoid penalties and taxes. Simply reaching the preservation age or retiring does not unlock all the trustee’s assets in the SMSF.
Consider the following SMSF property arrangements:
- The trustee owned the residential property prior to inclusion in the SMSF;
- The property was purchased through an SMSF loan;
- The SMSF asset is a commercial property.
Trustee owns the property
Unfortunately, owning the asset pre-SMSF membership doesn’t mean it may easily be reclaimed upon retirement whether as part of pension benefits or not. This is because the property becomes an asset of the trust once a trustee includes it as part of the SMSF’s portfolio.
The only way to decrease penalties and expense is to withdraw the property when all members of the SMSF have met the conditions of release or retire. However, it is not as simple as taking back the deed.
If the trustee retires and opts for a lump sum pension payment, they may be allowed to reclaim property if its current market value does not exceed the trustee’s pension amount or the balance of any trustee. The fund should also maintain enough cash to pay taxes and stamp duty where applicable.
If a trustee or their related party lives in the SMSF property without paying rent that is priced at the current market value, it could be considered as financial assistance. If this happens, the SMSF will fail the sole purpose test and the Commission would penalise the trust for breaching the law. The penalty could be taxes, fines and, if found guilty, disqualification.
A trustee can avoid this by separating personal and SMSF.
Residential property purchase through the SMSF
A trustee may argue that the property is theirs and was only purchased through the SMSF. However, ATO regulations state that any property purchased through a limited recourse borrowing arrangement (LRBA) remains an asset of the trust until certain conditions are met.
Under the ATO ruling, a trustee is allowed to purchase a single acquirable asset using money from an LRBA. Trustees are allowed to purchase the asset from the trust in one or more payments. It’s like buying a property with SMSF money then using the trustee’s pension to pay for it upon retirement.
However, trustees should ensure that the SMSF trust deed allows this option.
The ‘sale’ of the property should be at current market value and the trustee would have to shoulder applicable taxes and stamp duty.
The SMSF property is a commercial asset
SMSF rules only allow the acquisition of commercial property for business use, but a trustee may be permitted to live in it if certain conditions are met. A trustee would be allowed to take up residence in the commercial property if and only if their stay is incidental and relevant to the business operations.
However, there are two conditions to satisfy under the abovementioned rule:
First is that, for all types of properties, domestic use of the property should not be predominant. The business should operate year-round and pay necessary taxes.
The second condition is that the residential area must not exceed 2 hectares. This applies to farms and large properties that require operators to remain within the perimeter for its primary business. A cattle farm owner, for instance, could be allowed to live in the premises if the residence is less than 2 hectares.
There are other laws involved and the best way to ensure compliance is to either seek the advice of SMSF experts or separate personal and SMSF assets.
This information has been sourced from the Australian Taxation Office.