Self-managed superannuation funds (SMSF) are fairly commonplace these days. Your SMSF might own some of your farming land, or even a unit in the city or by the coast that you and your family use for holidays.
If so, you need to take steps to ensure your fund is compliant with all of the relevant legislation and regulations.
Self-managed super funds are a great succession planning tool. However, like all business structures, they are not right for every situation.
In particular, SMSFs are a form of trust. Like all trusts, the trustee has strict obligations, such as acting in the best interests of the beneficiaries (in this case, the members of the fund). However, SMSFs are also regulated by the Superannuation Industry (Supervision) Act 1993, which imposes some very specific rules on SMSFs.
For example, section 66 of the Act imposes certain prohibitions against an SMSF acquiring assets (including real property) from a ‘related party’. A ‘related party’ includes a member of the fund, any entity controlled by a member of the fund and a relative of any member. This means that in certain circumstances, it will not be permissible for your SMSF to purchase or otherwise acquire land from a family member as part of a succession plan. However, it is important to note that the Act does not create a blanket ban on such transactions, and there are many key exceptions, so it is important to seek professional advice on this issue. Notably, most of the exceptions require (at least) that the land be acquired at a market rate.
Further, once land is in the SMSF - however it is acquired - there are strict rules about how such land can be used by entities related to the members of the fund. For example, if primary production land is owned by a SMSF, the entity that is farming it (for example, the trading trust or family partnership) needs to pay a market rent for the use of that land. The ‘market rent’ is to be assessed on the basis of the ‘highest and best use’ of the asset as recognised in the market by reference to objective and supportable data. In some cases, it will be necessary to seek a formal valuation for this purpose.
Similarly, if an SMSF owns a residential property, the trustee of the SMSF is required to ensure that the property yields are market rent. This means that the SMSF can’t buy a holiday home that is used by family members (rent-free). However, it could buy a holiday home that is (for example) available to holiday-makers on Airbnb.
The rules relating to SMSFs are complex and it is vital to get tailored, professional advice regarding the acquisition of assets in the fund. This is particularly true when dealing with ‘in-house’ assets – that is, assets that you and your family/related entities wish to make use of. As always, the golden rule when dealing with trusts is that once an asset is in a trust, it is no longer yours and yours alone. You may find that if you do not get the right advice up front, although the tax benefits are great, you cannot deal with the asset in the way you want.
This article was published in The Stock Journal on 12 November.