Property investments certainly seem to be the investment du jour for many self-managed super fund (SMSF) investors.
In some cases, SMSF trustees will think about buying some real estate with another investor. There is nothing wrong with this approach from a purely theoretical perspective. Put simply, the super laws don’t prohibit a super fund from jointly owning an asset with another party.
In this article I’m going to explain some basic structural issues you’ll need to consider:
As always, the first step is to review your super fund’s trust deed to make sure it doesn’t stop joint investments of the type you’re thinking about. If it prevents joint investments, you’ll need to have this amended.
Option one: direct ownership
There are advantages and disadvantages to direct ownership. With this option, both parties will be listed as owners on the property’s title. You will need to decide whether the owners will be joint tenants or tenants in common. Joint tenancy implies two equal owners and involves the right of survivorship – that is, the interest held by each party will pass to the other upon one’s death. Tenants in common, however, means ownership doesn’t have to be equal and each owner can deal with their share without influence from anyone else. In both cases, any change to ownership will incur legal costs and stamp duty. With direct ownership, it’s essential that a joint bank account be used to deposit income and be used for all relevant expenses.
Option two: unit trust
Perhaps you might consider using a unit trust. The trustee purchases the property after each party has contributed funds into the unit trust. The advantage here is that equal ownership isn’t essential and it’s possible for small unit holdings to change hands as required without necessarily incurring legal and stamp duty costs. With these trusts, it’s vital to decide who should be the unit trust’s trustee. Also important are the provisions controlling how the trustee can be removed or replaced and disputes settled. As long as the unit trust distributes all net income to the unit holders, then income tax issues should reside with the unit holders.
Option three: company asset
A third option is to hold the asset in a company. This is similar to using a unit trust except the company will pay income tax and distribute the net income via dividends. Any attached imputation credits are used, and for most super funds refunded when each shareholder submits their income tax return. Obviously, this means less income is distributed before the annual tax issues are dealt with. Similar to the issues about a unit trust’s trustee, the choice of the company’s directors is important as is the rules about replacing or removing directors and settling disputes in the company’s constitution.
Whatever ownership option you choose, you will need to make a judgment as to whether your joint investment will need an Australian Business Number (ABN).
Another consideration is goods and services tax (GST), especially if the property is a commercial property. The Australian Tax Office (ATO) issued a Tax Ruling (GSTR 2004/2) about Joint Ventures in early 2004 and published an update in 2010. The ATO says a joint venture is an arrangement between at least two parties that has certain features, such as being established to undertake a specific commercial venture, and the sharing of a product or output, not sale proceeds or profits. A contractual arrangement between the parties must exist and joint control is exercised over the operation and the costs of the endeavour are shared.
Ordinarily, a joint venture doesn’t need to be registered for GST. However, a tenants-in-common investment may be considered a partnership and may need GST registration.
Well-qualified accountants are often good sounding boards on which ownership structure is best suited to you as well as the related ABN and GST issues.
In my next column, I’ll discuss some operational issues that will have to be considered. One area we’ll look at is the deliberate or indirect provision of financial advice to super fund members.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: Is this bull run too good to be true? [1]
- Paul Rickard: New bank covered bonds weigh on hybrid prices [2]
- George Boubouras: Finding the right asset allocation for your SMSF [3]
- Rudi Filapek-Vandyck: The broker wrap: here comes earnings season [4]