SMSF scheme: residential property purchase

With the never-ending increase in Australian house prices, many desperate home buyers are often turning to other, perhaps unconventional, means to secure housing, one such property scheme currently making the rounds involves the use of SMSFs and has caught the ATO’s attention. The scheme is classified as an illegal early release by the ATO and typically involves the rollover a member’s super benefits from an existing fund into a new or existing SMSF, which then invests in a property trust for a fixed period and rate of return, being a contributory fund with other investors. However, the money from the property trust is then on-lent to individuals from a third-party in the form of a loan to assist in the purchase of real property secured by mortgages over the property. 

According to the ATO, the money on-lent to the individual can be used for all or part of the deposit, the balance of the purchase price, costs relating to the purchase, or even to help consolidate a member’s personal debts to enable them to secure a home loan. The scheme promoter will usually charge a high fee to the fund and establish both the SMSF and the property investment as well as organising the purchase of the property (in some cases house and land packages). 

While the ATO notes that these arrangements are established and promoted under the guise of a genuine SMSF investment with the added benefit of helping individuals purchase a home, they are not in fact legitimate investments and often contravene one or more of the super laws by providing members with a current day benefit while also being set up in a way that does not comply with the sole purpose test. As a quick recap, the sole purpose test means that the SMSF needs to be maintained for the sole purpose of providing retirement benefits to members or to their dependants if a member dies before retirement. 

Failing to meet the sole purpose tests results in the fund losing its concessional tax treatment and trustees potentially facing civil and/or criminal penalties. In terms of this particular scheme, the ATO noted that a “look through” approach will be applied to consider any arrangements entered into as a whole. That means if an SMSF’s fund money is used to help purchase a property for a member, whether it be indirectly through the SMSF’s investment in other entities, it will be treated as an illegal early access of super benefits by the member. The amount of illegal early access (ie the amount used the help purchase a property) will be included in the member’s assessable income and taxed at their marginal rate. 

Tax shortfall penalties may also apply to the amount released. Individuals that have inadvertently entered into these schemes persuaded by slick marketing or promoters are urged to contact the ATO to make a voluntary disclosure. The ATO notes that voluntary disclosures will be taken into account when determining any penalties which may apply and what actions will need to be taken.

Speak to one of our accountants if you have any questions about the changes in tax for 2023.