Beware the pitfalls of real estate held in trusts and sting of breaking law
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.
John Collett
Frequently Asked Questions about this Article…
Holding property in an SMSF can be risky if the structure or process is wrong. Risks include heavy civil penalties (up to $220,000), disqualification of fund trustees, and breaches of legal obligations if trustees don’t fully understand or deliberately flout the rules.
Investors are attracted by the tax advantages of holding property in super and marketing that promises faster retirement growth. Many seminars and outfits promote a one‑stop shop combining the property, the mortgage and SMSF administration, which is why property in SMSFs is popular online.
A bare trust is a separate legal structure used when property is geared through an SMSF. The property is held in the holding (bare) trust while the SMSF is the beneficial owner. That means the asset isn’t held directly in the fund but the SMSF has beneficial ownership through the bare trust.
Sequencing is crucial: the SMSF must be established before signing the contract of sale. If the timing or setup is wrong, the purchase can breach SMSF rules and expose trustees to penalties and compliance problems.
A limited recourse loan is a special type of mortgage for SMSF property where, if the borrower defaults, the lender’s recourse is limited to the property itself. This loan type is required for geared property within an SMSF to meet legal lending rules for superannuation.
Yes. Although the loan must be limited recourse, lenders commonly require SMSF members to provide personal guarantees. If a sale of the property doesn’t cover the mortgage, the lender can seek to recover the shortfall from the fund members who gave guarantees.
No. Responsibility for running an SMSF cannot be outsourced. Even if third‑party outfits offer to handle the property, mortgage and administration, trustees remain legally responsible for compliance and can be penalised for breaches.
The Tax Office has warned that some trustees use super funds to invest in property without understanding obligations or deliberately flouting the law. Breaches can lead to trustee disqualification and civil penalties of up to $220,000.
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