Beware the pitfalls of real estate held in trusts and sting of breaking law
Search the internet with the words "SMSF" and "real estate" and you will see hundreds of hits from what appear to be property investment schemes.
The tax advantages of holding property in super are the lure. Many outfits are offering a one-stop shop with the property, the mortgage and the compliance and administration of the SMSF.
There will be invitations to seminars where investors will discover the secret to doubling their retirement savings and pay next-to-nothing in tax. But be careful.
Getting the structure wrong for holding property in an SMSF will attract big penalties. The Tax Office said last year that some trustees were using their superannuation funds to invest in property without fully understanding their legal obligations, or were deliberately flouting the law.
Responsibility for an SMSF cannot be outsourced.
Breaches of the law can result in a fund's trustees being disqualified and facing civil penalties of up to $220,000. The geared property is not actually held directly in the fund but in a holding trust, called a bare trust, which is a separate legal structure with the SMSF as the "beneficial owner" of the property. The correct sequencing is crucial.
It is important the SMSF is begun before signing the contract of sale for the property. The mortgage must be a special type called "limited recourse", meaning if the borrower defaults, lenders have recourse only to the property. However, lenders usually require the SMSF members to give "personal guarantees" over the loan.
That means if the lender has to sell the property and the sale proceeds do not cover the mortgage, the lender can recover the shortfall from the members of the fund.