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Self Managed Super Fund (SMSF) Article
Resort Properties in SMSFs
By Tony Negline.
This article may be out of date.
23rd August 2006
Tax rules and regulatory rules are, broadly speaking, the twin peaks of superannuation regulation. Other rules often get in the way -- for example, those connected with Centrelink and aged care. Taken as a whole, all these rules are complicated.
Before long, we will know if the Government's super simplification announcements have actually made a difference. Thus far, the Government's ideas impact on the taxation of super more than any other area.
The job of significantly reducing the regulatory burden of super remains incomplete. As a result, investors often have trouble working out how a prospective investment might fit around the superannuation laws. This is particularly the case when other complex laws are used to structure an investment.
Take, for example, an investment structure that Mirvac, a major property developer, uses frequently. The property developer creates a strata title over a parcel of land.
In one such development, investors can purchase one, two or three-bedroom flats. These flats can be used exclusively by their owner or can be leased to a company associated with Mirvac which uses the properties to run a hotel and resort.
Under the terms of the lease, the property owner has the right to use their flat for a set number of days each year for a reduced rent.
If an owner's property is unavailable, then they can rent another one. Owners who lease their properties to the hotelier share in net rental income. Owners who do not use their right to use their property receive a larger share of net rental income.
Every property owner can use the resort facilities such as a pool and tennis court around the hotel development free of charge.
The initial lease has a two-year term and has a built-in facility to extend beyond that period if both parties agree. In one property development, initial investors also get complimentary golf club membership on the course that is part of the same development.
At least three questions emerge out of this proposed leasing structure:
- Can a super fund buy this property from the developer or subsequent owner?
- If the property is owned by the super fund can its members, or their associates, use this property or another one in the same development?
- Finally, could a super fund buy this from a fund member?
Let's look at each of these questions in turn.
Firstly, can a super fund buy the property from the developer or subsequent owner?
Assuming a super fund's trustees believed that such an investment suited its investment strategy and the fund's trust deed allowed the investment, then a super fund could buy this property from the developer or unrelated subsequent owner.
Now comes the thorny issue of how fund members or their relatives may be able to use the property if it is owned by a super fund.
It is a well-known rule that super fund members cannot use real property owned by a super fund if that property is not used wholly and exclusively in the running of a business or the market value of that property represents less than 5 per cent of the market value of all the super fund's assets.
It's clear that if the fund property subject to the above arrangements were used by fund members or their associated at a rate less than the prevailing market rent then this super law would be breached.
James Bell, Mirvac director of sales and marketing, said that some super funds which had bought properties and leased the property to the hotelier had altered the lease so that the members could not use the property owned by the super fund.
Is this an acceptable transaction? At this point, it is important to remember that leaseholders, while hotel residents, get free use of the hotel's facilities, including golf.
Could fund members use these facilities?
To answer this question we must refer to an 11-year-old Administrative Appeals Tribunal case which is referred to as the Swiss Chalet case.
The super fund involved in this case owned a ski chalet in Switzerland and the fund's members regularly stayed at the property during the European ski season.
It also owned a golf club membership and a property on the Mornington Peninsula which were used by the fund's members and for corporate entertaining. The super fund in question lost access to tax concessions because it was found to have breached the "sole purpose test".
This test says super funds must only exist to provide certain types of benefits for members (eg retirement benefits) and any other benefits a member or employer might get along the way must be incidental.
This is a complex legal matter. It would seem that the more prudent view is that obtaining the above benefits is not incidental and hence may be a breach of the sole purpose test.
Finally, could a super fund buy this from a fund member? If the member or their associates had stayed at the resort, then the property has not been used exclusively in the running of a business. If this is the case, the super fund could not buy the property from its member.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.