The Essential Guide To SMSFs & Real Property

Owning property is the Australian dream. However, with prices soaring, it's not easy to get your foot on the ladder, so many people are now turning to self-managed super funds (SMSFs) as a way of buying property.

This article will provide an overview of what you need to know about SMSFs and how they can help you buy property.

We'll also cover some common misconceptions about SMSFs - like that they're only for wealthy retirees or that banks won't accept them - and discuss why these aren't true! There's never been a better time than now to find out more about this great investment opportunity.

In recent years, self-managed superannuation funds (SMSFs) have become increasingly popular as a way to save for retirement. But what many people don't realise is that SMSFs can also be used to buy property – which can be a great way to secure your financial future.

In this post, we'll look at how SMSFs work and outline the pros and cons of using them to buy property. We'll also provide some tips on how to get started.

It's not an easy task to set up a Self Managed Super Fund (SMSF) on your own. So many aspects need to be considered before you can even start looking at properties, which is why this blog post has been created as the first in what will hopefully become a series of posts designed to help you find your way through the process of buying a property with SMSFs.

It's a big decision to make - whether or not you should invest in property. But it doesn't have to be an overwhelming experience. In this post, we'll break down some of the basics of what SMSFs are and how they work, as well as give you tips on buying your first property with your SMSF. So if you're wondering if investing in property is for you, keep reading!

If you're considering buying a property, your SMSF must have the right strategy in place. With a few simple steps and following some easy guidelines, you can ensure that your retirement is as secure as possible.

In this post, we will explore how to buy a property with an SMSF and what to consider before investing in real estate now or later on. This blog post will also provide links for further information, including the ATO's website, where you can find more details about buying a property with an SMSF.

So if you're looking for help with setting up your fund or want guidance on whether now is the time to invest in real estate - keep reading!

It can be hard to know where to start when it comes to managing your finances, but there is one thing that you should always keep in mind: property. Whether you are buying or renting, this article will help you navigate the world of real estate.

The Essential Guide To SMSFs & Buying Property is here to provide all the information you'll need about how these funds work and the steps involved in setting one up so that you can more easily navigate your way through everything once it comes time for purchasing a property.

So let's jump in!

SMSFs, Business Real Property and The Small Business CGT cap

Clients who own small businesses frequently express interest in transferring their commercial real estate into their self-managed super fund (SMSF) in the form of an in-kind contribution so that they can make the most of the favourable tax climate around superannuation.

Some customers have asked about the possibility of utilising the CGT small business exemptions and making an in-specie contribution to super while concurrently making use of the lifetime CGT cap in order to expedite the transfer.

However, the ATO has indicated through several private binding rulings that in-specie contributions of active assets, such as business real property, may not qualify for the lifetime CGT cap in situations where the in-specie super contribution is the CGT event that qualifies for the small business CGT concessions. This is the case when the in-specie contribution is the CGT event that qualifies for the lifetime CGT cap.

As a consequence of this, a client's capacity to access these lucrative concessions may be hindered, and careful planning is required to structure their contributions in a way that complies with these complicated restrictions.

1. Lifetime CGT cap 

Under the CGT small business concessions, a small business owner who sells an active asset may be eligible to disregard some or all of the capital gain that results from the sale of the asset. This concession applies when the owner sells the asset.

In addition, there is a possibility that they may donate some or all of the proceeds from the sale to their superannuation account, and they could choose to have those contributions count towards the lifetime capital gains tax cap.

For the 2018–19 fiscal year, the lifetime CGT cap is set at $1.48 million (indexed annually). Contributions that are counted towards the lifetime capital gains tax cap are neither concessional nor non-concessional.

To access the lifetime capital gains tax cap, an individual, organisation, or trust generally needs to meet the requirements for either the 15-year exemption or the retirement exemption of $500,000.

Contribution type

• An individual who is excused from the requirement to recognise capital gains due to retirement.
• An individual who, because of the 15-year exemption, is exempt from having to report capital gains.
• To overlook as a financial gain under the retirement exemption a reputable company or organisation.
• If the company is reliable enough to overlook the capital gain, they have 15 years to do so.

The sum that is subject to the lifetime CGT cap

• The amount of unrealised gains on investments that can be disregarded thanks to the retirement exemption (up to a maximum of $500,000).
• Amount of revenues from the sale of capital
• Amount that can be paid to a CGT concession stakeholder as compensation for their portion of the amount that is exempt from taxation (up to a maximum of $500,000).
• The total amount of payment that stakeholders in the CGT concession have received for their portion of capital proceeds

When it comes to making payments to the CGT on behalf of a small business, the payment needs to be done within very specific time constraints depending on the conditions.

Example of a contribution that counts towards the lifetime limit on CGT:

Matthew and Lily, both of whom are in their 70s, are farmers who have been operating a primary production enterprise for more than a decade. They manage their company out of a farm that they jointly own, hence the farm can technically be considered real property.

They come to the conclusion that retirement is the best option for them, so they will sell the farm to a third-party buyer for its current value of $1.4 million.

Since Matthew and Lily satisfy all of the fundamental requirements for small business CGT exclusions and the 15-year exemption, they are able to disregard any potential capital gains that come from the sale of their business.

They are eligible to make contributions to their superannuation accounts under the lifetime CGT cap, provided that they fulfil the work test, using the $700,000 that is their share of the capital profits from the sale.

It is important to keep in mind that this rule is applicable even if Matthew and Lily's total superannuation balance at the end of the preceding fiscal year was worth more than $1.6 million because the contributions are not considered to be non-concessional.

2. Contributions made by individuals and the lifetime CGT ceiling

In the case of Matthew and Lily, the working asset of the farm was sold, and, in accordance with the lifetime cap on CGT contributions, a cash contribution was made to the retirement account. When an in-kind donation is part of the transaction, the circumstance, however, becomes more difficult to navigate.

As an illustration, let's say Matthew and Lily contributed an in-kind asset such as their farm to their self-managed super fund (SMSF). Because the super contribution is also an event that qualifies for the small business CGT discounts, it is possible that they will not qualify for the lifetime capital gains tax cap.

The Australian Taxation Office (ATO) has suggested in various private rulings that a contributor will not be able to utilise the lifetime CGT cap in the case of an in-specie transfer of an active asset into an SMSF. This is because the ATO will apply the small business CGT exemption to the same CGT event.

According to the statement made by the Commissioner, the legislation does not take into account the possibility that the CGT event, choice (if paid from a company or trust), and contribution of the CGT exempt amount will all take place at the same time. As a result, the CGT event must take place before a contribution is made rather than simultaneously with the donation being made.

This view has significant repercussions due to the fact that in-specie contributions, which do not count towards the lifetime CGT cap, will instead be treated as personal non-concessional contributions and count towards the non-concessional cap (assuming the member does not claim a tax deduction for some or all of the contribution), which may result in an excess of non-concessional contributions. This view has important implications due to the fact that these contributions will be treated as personal non-concessional contributions.

As a result of these concerns, financial advisors should encourage their clients to seek a private binding ruling in the event that they intend to make use of the lifetime CGT cap for an in-specie transfer in conjunction with the application of the small business CGT exemption for the same CGT event.

3. Alternative Courses of Action

Following is an explanation of three potential alternative procedures that can be used to accomplish the objective of transferring the asset into the SMSF without falling under the purview of the in-specie contribution concern that was discussed before.

• A client's active asset is purchased by an SMSF from the client.

Because the SMSF has access to the necessary cash, it has the ability to purchase the active asset from the client (or the client's trust or corporation).

This accomplishes the purpose of shifting the asset into the SMSF and giving cash proceeds to the client (or their company or trust), which may then be donated to super under the lifetime CGT cap. Those cash proceeds can also be used to offset any tax liability that may arise from the transaction.

To continue with the scenario involving Matthew and Lily, their self-managed super fund (SMSF) would be able to acquire the farm from them if it had cash reserves of $1.4 million. After that, Matthew and Lily would be able to make contributions to their investment account using the cash proceeds from the sale.

When putting this plan into action, there are a few essential considerations that must be kept in mind, including the following:

• An SMSF is only allowed to buy specific assets from related parties, such as commercial real estate that is utilised completely and solely for commercial purposes in any business. Goodwill of a corporation, shares in a private company, or units in a linked trust are examples of active assets that cannot be purchased under normal circumstances. This restriction does not apply to corporate real estate.

The purchase has to be done on neutral conditions and at the going rate of the market. It is possible that the SMSF will be required to get an independent professional appraisal in order to establish the sale price; for more information, see the Valuation guideline for SMSFs published by the ATO.

• The client sells the active asset to the SMSF, and the SMSF then purchases it via a limited recourse borrowing agreement (LRBA)

In circumstances in which the SMSF does not have the necessary cash available to complete the purchase of the active asset from the client, one of the alternatives accessible to the SMSF is to borrow the money necessary to complete the acquisition through the use of an LRBA.

The cash proceeds from the sale could then be re-contributed to the fund within the limits of the lifetime capital gains tax and used to cancel the outstanding amount of the LRBA loan.

It is essential to keep in mind, on the other hand, that additional expenses will be incurred as a result of this arrangement because the fund will be required to construct a conforming LRBA, which will include the necessary bare trust arrangements.

When a fund borrows money from a connected person, more caution is required to ensure that the loan conforms with the safe harbour guidelines outlined in ATO PCG 2016/5. These criteria may be found in the document.

If this is not the case, the trustee will be required to provide evidence that the loan was made on terms that were not related to the asset's value. If this is not the case, any income produced from the asset may be taxed as income related to the asset's value.

• Contribution in kind of an asset for a distinct capital gains taxation event applicable to small businesses

Imagine that a client is looking to sell a number of their active assets. If this is the case, they may want to think about initiating a CGT event with respect to one of those assets and then using the capital proceeds they obtain to make an in-kind contribution under the CGT cap of a different asset instead of the capital gains they received.

For instance, in ATO ID 2010/217, the ATO confirmed that in the event that a taxpayer sold an asset that was eligible for the $500,000 retirement exemption, the taxpayer could contribute a different asset under the lifetime CGT cap instead of contributing the cash proceeds that were received from the sale of the asset.

This is crucial because it may enable a customer to contribute an asset to their SMSF within the lifetime capital gains tax cap by way of an in-specie transfer direct to their SMSF.

Stamp Duty

1. Contributions to SMSFs

Since the 17th of June in 2003, funds that purchase commercial real estate in the state of Victoria from members have been required to pay stamp duty on the transaction.

In the past, the provision of sub-section 41(1) of the Duties Act 2000 (Vic) stated that there was to be no payment of duty on the transfer of dutiable property to a trustee of a conforming superannuation fund if there was no change in the beneficial ownership of the property.

The transferor's status as a beneficiary of the transferee superannuation fund is not considered to have resulted in a change in beneficial ownership under subsection 41(3).

Therefore, there was a stamp duty exemption in the following situations:

• a fund paid a member a consideration equal to the property's market worth in order to purchase the dutiable business real property; and
• a contribution of dutiable property was made to the fund in the form of an in-kind gift that was not tax deductible.

The change had the effect of removing the stamp duty exemption that applied to funds that acquired dutiable property for consideration from members of the fund. This was the result of the amendment. Because of this adjustment, the member is no longer able to obtain tax-free cash from the fund by contributing commercial real estate to it from the member's business.

The following can be found in the explanatory memorandum to the amending legislation Act:

"The amendment is necessary in order to restore the intention of the exemption, which was to permit duty-free donations to superannuation funds by members without dilution of the assets of the fund,"

The change brings the exemption back to its previous status under the Stamps Act of 1958, which has since been abolished (Vic). A stamp duty exemption was granted to superannuation funds that acquired real property by way of gift under Headings (13), (14) and (15) of the Third Schedule to the Stamps Act. This exemption was granted in situations in which a member made an in-specie, undeducted contribution to the fund or in situations in which an employer made an in-specie contribution to the fund when it was not required to do so. Similarly, an exemption was granted in situations in which an employer made an in-spec

However, as was said earlier, an employer is also responsible for considering the tax consequences of any fringe benefits that may be associated with an in-kind donation. As a result, employers incur a liability under the FBT when their contributions are completed by the transfer of assets in their physical form. A point of view that is shared by the ATO.

Because the SIS Act mandates that funds acquire assets through fair and open competition, the transfer of members' assets to funds in exchange for consideration will be subject to taxation.

The exemption will now only apply to acquisitions that result from a member making an undeducted contribution of real property or an in-specie contribution of commercial real property in the form of a contribution to their super fund, regardless of whether the contribution is deductible or not.

2. Land Rich entities

Provisions that impose a charge on certain allotments and transfers of units or shares in private unit trusts and firms that are land rich can be found in each and every state and territory in the country.

For instance, in Victoria, an organisation is considered to have a substantial amount of land holdings if at least sixty percent of its total assets consist of real property and have an unencumbered market value of one million dollars or more.

Any additional interest purchased by a super fund that already has a "substantial interest" in a land rich corporation will be liable to stamp duty at ad valorem rates, regardless of whether the interest was obtained through the transfer of units or shares or through the allotment of units.

When the entity in question is a private unit trust, "significant interest" refers to the entitlement to receive at least 20% of the property in the event of a distribution. However, "significant interest" refers to the entitlement to receive at least 50% of the property when the entity in question is a wholesale unit trust or a private company.

Therefore, exercise extreme caution when recommending clients to use super funds to acquire shares in private unit trusts or corporations, particularly in situations where the super funds in question are making use of the transitional in-house asset rules provided for under the SIS Act.

Let's say the unencumbered capital worth of real property held by the investment vehicle is less than the $1 million limits or makes up less than 60% of all the assets. In this case, the investment vehicle is considered to be in a lower risk category. If this is the case, then the fund will not be required to pay any duty when it reinvests any profits or distributions that it has received.

However, once the unencumbered value of the property owned by the investment vehicle exceeds $1 million and comprises more than 60 percent of the value of all assets, then any further acquisition of units or shares will be subject to stamp duty if the fund owns more than 20 percent of the interest in the investment vehicle.

Land Tax

According to section 52 of the Land Tax Act 1958 (Vic), the trustee of a self-managed super fund (SMSF) is liable for land tax on any real property held by the fund, just as if the fund were the beneficial owner of that land. This liability exists regardless of whether or not the fund actually is the beneficial owner of the land. As a result, the amount of land tax paid is determined using a sliding scale that takes into account all of the entity's real property holdings.

The land tax burden of a company is going to increase proportionately with the number of properties that it owns. As a consequence of this, one tactic that is utilised rather frequently is to divide up various sections of land into several ownership units.

It seems to me that self-managed superannuation funds (SMSFs) that have considerable property holdings should also think about using this technique.

The properties can still be held in a setting that is compliant with superannuation regulations (which may be desirable for all of the reasons I have already been through). Despite this, various properties would be held in separate SMSFs according to their type.

According to one point of view, the desired outcome regarding land taxes might be accomplished by merely utilising several trustee corporations for the numerous SMSFs. However, prior to deciding on this course of action, the following considerations ought to be analysed and weighed:

• there is a possibility that any possible savings on land tax will be offset by the costs of incorporating the trustee firms and administering the various SMSFs;
• the ability of the Commissioner to treat the trustees of each of the SMSFs as joint owners of all of the properties under sections 45 and 51 of the Land Tax Act; and
• whether there is also a plausible commercial rationale for adopting several trustees other than to avoid the operation of the anti-avoidance clause in section 71 of the Land Tax Act 1958. this provision was put in place to prevent people from avoiding paying land tax.
• GST

When moving real property into or out of an SMSF, one must also take into consideration the GST implications of doing so.

Only in situations in which the transferor is registered for GST or is needed to be registered for GST will GST be an issue. For instance, this is commonly the case when the SMSF is purchasing commercial real estate for the business.

In general, the goods and services tax (GST) concerns and repercussions will be the same as for any other real property transaction; hence, I do not want to go into depth about them in this paper. Having said that, there are a few concerns that demand separate mention for whatever reason.

To begin, in situations in which the SMSF is not registered (and is not obliged to be registered), the Goods and Services Tax (GST) constitutes a significant expense to the SMSF. This is because the SMSF will not be eligible to collect input tax credits related to the acquisition.

In addition to the higher stamp duty and other other fees, this cost will also be incurred (as stamp duty is assessed on the GST inclusive consideration). This issue is frequently circumvented by utilising a number of different GST concessions and exclusions, the most pertinent of which are as follows:

• supplies of farmland (Subdivision 38-F);
• supplies of going concerns (Subdivision 38-J);
• margin scheme (Division 75); and
• input taxed supplies of residential premises (Subdivision 40-C).

Second, just because an SMSF purchases real property through a specie contribution does not necessarily mean that the GST will not apply to the transaction because there was no consideration involved.

As was pointed out earlier, the SMSF is required to do business with the member (or associate) at a distance and offer market value consideration in exchange for the supply. Regarding the Goods and Services Tax, it makes no difference whether the consideration is delivered in the form of a cash payment or a credit to the member's account.

Real Estate Development

Trustees of self-managed super funds (SMSFs) are diversifying their investment strategies more and more, moving away from the traditional focus on property investments that yield rental income.

Instead, the rate at which a fund's real property investment increases in value over time is equally as essential (and often potentially more so). Keeping this information in mind, trustees of SMSFs are beginning the process of determining how the assets of their funds can be invested in property development projects.

We are noticing more and more that accountants and financial advisers are establishing unit trusts and small proprietary companies in order to make it possible for SMSFs to invest in large-scale property development projects. These trusts and companies use the capital raised from the investments of their SMSF clients in order to buy and develop residential, retail, and industrial property. This trend is becoming more noticeable to us.

We have already covered some of the tax concerns that are connected with investing through a unit trust earlier on in this piece of writing; however, what are some of the other pitfalls that are involved with engaging in these kinds of structures?

The development of real estate through the use of a unit trust.

1. Corporations Act

When an accountant or financial consultant establishes a unit trust, one of the risks they face is the possibility of unknowingly falling within the jurisdiction of the Corporations Act. This is one of the potential pitfalls.

It is possible that the unit trust will be needed to register with ASIC as a managed investment scheme if it has more than 20 participants, as stated in Chapter 5C of the Corporations Act 2001 (often known as the "Corporations Act").

It is of the utmost importance to note (and a pitfall that many advisers fall into) that in order to determine how many investors are in the trust, in accordance with the provisions of section 601ED of the Corporations Act, you cannot merely count the number of SMSFs that have invested in the unit trust. This is one of the factors that must be taken into consideration.

You make a tally of the number of members of each SMSF who have contributed money. This indicates that you may reach the maximum number of permitted investors with as low as five investing SMSFs.

Additionally, the trustee of the unit trust is going to be required by ASIC to acquire an AFSL for a responsible business.

Consider the scenario in which the accountant or financial consultant sets up many unit trusts. In that scenario, there is also the possibility that ASIC will consider the accountant or adviser to be "in the business" of marketing such schemes, which has its own set of challenges and potential repercussions. If this is the case, then according to section 601ED(1), each of the unit trusts will be required to register with ASIC, notwithstanding the fact that each may have a different number of investors.

In order to market or run the unit trust, the trustee of the trust may additionally be required to have an Australian Financial Services Licence (abbreviated AFSL).

If the client is to be recommended an investment in the unit trust, either the accountant or the financial adviser may be required to possess an AFSL or to be an authorised representative of a licensee holding one in order to do so.

In conclusion, it is quite likely that a Product Disclosure Statement will have to be prepared with regard to the unit trust.

When all of these factors are considered, it is abundantly evident that SMSFs that make property-related investments through a unit trust would, in the vast majority of circumstances, only be a viable solution in situations in which the new financial services regime can be fully avoided!

2. Prudential Regulation/SIS Act

The majority of the SIS Act's prudential requirements, which have already been discussed in this article and apply to investments made by SMSFs, also apply to investments made in unit trusts.

This involves maintaining a distance between the fund and the investment, according to the "single purpose test," and ensuring that the investment is in line with the overall investment strategy of the fund.

However, when it comes to this particular sort of investment, significant consideration also needs to be given to in-house asset restrictions for superannuation funds that are investing into unit trusts.

As we have seen, the SIS Act, notably section 71(1), stipulates that it is illegal to make any type of investment in a connected trust unless that type of investment is specifically exempted.

As a result, the most important point to address is whether or not the SMSF and the unit trust are connected trusts.

According to the SIS Act, section 10(1), a linked trust is defined as a trust that is controlled either by a member of the fund or by a standard employer-sponsor of the fund. The SIS Act has a definition of "control of trust" in its section 70E.

According to subsection 70E(2) of the SIS Act, a superannuation fund is considered to be the controller of a trust in the event that:

• a fixed right to more than fifty percent of the capital or income of the trust is held by a group that is associated with the superannuation fund;
• The trust's trustee is used to acting in accordance with group wishes regarding the superannuation fund, is obligated (whether formally or informally), or might reasonably be expected to do so (regardless of whether such directions, instructions, or wishes are communicated directly, indirectly, or through intermediary companies, partnerships, or trusts);
• the trustee of a superannuation fund can be removed or appointed by a group associated with the fund.

Section 70E(3) of the SIS Act defines a group pertaining to a superannuation fund as the superannuation fund and connected parties of the superannuation fund acting alone or jointly.

Therefore, if you ensure that there are a sufficient number of investors in the unit trust, the investment that the SMSF makes in the unit trust will not be considered an in-house asset for the SMSF. This is given that you ensure that there are sufficient investors in the unit trust.

The last question that needs to be answered is whether or not the unit trust will take out loans in order to advance its property development business. It is against the law for the trustee of a superannuation fund to borrow money or to keep an existing borrowing of money going, according to Section 67 of the SIS Act.

On the other hand, according to our plan, the unit trust, and not the fund, will be the one to undertake the borrowings that are being considered. Because this clause does not take a look-through approach, there are no limitations placed on the trustee of the unit trust when it comes to borrowing the necessary funds for the project.

However, it will still be essential to take into account whether or not there are any borrowings from unit trusts. Hardoon v. Belilos [1901] AC 118 and affirmed by the Victorian Supreme Court in JW Broomhead (Vic) Pty Limited (In Liq) v JW Broomhead Pty Limited [1985] VR 891 established that a unitholder has a legal obligation to indemnify the trustee of a unit trust against any liabilities that may be incurred by the trustee of the unit trust. This is in accordance with the common law.

In light of this, if:

• the trustee has the right to be indemnified from the unit trust assets under the terms of the trust deed that governs the unit trust;
• the trustee of the unit trust will, in the course of performing its obligations in an appropriate manner, legitimately incur liabilities; and
• the assets of the unit trust are not enough to cover these liabilities; therefore, the unitholders (including any superannuation funds) would be responsible for those debts to the extent of their unitholdings.

We would like to point out that our viewpoint coincides with that of the APRA, which is stated in paragraph 21 of the Superannuation Circular No. II.D.4 as follows:

"Any investment in a geared unit trust has the risk of lowering the level of entitlement guarantee enjoyed by members of the trust. As a consequence of this, the existence of a unit trust borrowing is a relevant issue that the trustee must take into account when formulating and putting into action the investment plan of a fund in accordance with section 52(2)(f) of SIS."

To ensure that an investment in a unit trust does not run counter to the investment strategy of a fund, the trustee of the fund should verify that the class of units that will be issued to the fund places a limit on the fund's liability to the extent that the subscription price of the units does. This will prevent the investment from working against the investment strategy of the fund.

However, in order for this condition to be enforceable, it must be expressly omitted from the deed of the unit trust that the unit holders have limited liability.

The development of real estate through the use of a proprietary firm

3. Corporations Act

When compared to the use of a unit trust, the formation of a small proprietary business could, in some respects, help alleviate some of the concerns raised by the Corporations Act.

For instance, a corporate body such as a proprietary company is expressly disqualified from participation in the defined managed investment scheme that may be found in section 9 of the Corporations Act. Consequently, there is no longer any need for the unit trust to comply with registration or licencing requirements.

In addition, so long as the promoters of the company only make personal offers of company shares, which result in fewer than twenty investors and fewer than two million dollars being raised in any given twelve-month period, fundraising under Chapter 6D of the Corporations Act will not require the issuance of a prospectus in order to proceed.

However, it is important to keep in mind that shares in a firm are still regarded as a type of financial product. In light of this, anyone who advises their SMSF clients to invest in such a company will still need an appropriately authorised AFSL prior to providing that kind of financial advice to their consumers.

4. Prudential Regulation/SIS Act

Again, in terms of prudential regulation, the most important thing for the trustee of the SMSF to do is to make sure that the fund does not violate the in-house asset regulations. This is the most important prudential concern.

It is against the law for the trustee of a superannuation fund to invest in a related party of the fund, according to subsection 71(1) of the SIS Act.

A "associated party" of a superannuation fund is defined in accordance with Section 10 of the SIS Act, which includes the following categories:

• a member of the fund;
• an employer who acts as a typical sponsor of the fund; or
• a person who is an associate under Part 8 of an entity that is either referred to in paragraph I or (ii).

Assuming that none of the members of an investing self-managed fund will be involved in the day-to-day operations of the proprietary firm, the company in question should not be considered a related party of the SMSF under either I or (ii) (ii).

In regard to clause (iii), a firm will only be considered a Part 8 affiliate of an SMSF if it is sufficiently influenced by a member of the SMSF, or if the member of the SMSF has a majority voting stake in the company (see to clause (f) of section 70B of the SIS Act).

Again, provided that there is an enough number of investors in the company, it is quite unlikely that an investing SMSF will violate the in-house asset regulations of the SIS Act. This is because of the large number of investors that are already present.

The trustee of the SMSF will still be responsible for ensuring that the fund conforms with the single purpose test, the fund's investment plan, and that the investment is made on an arm's length basis when making investments.

5. Tax Repercussions

In addition to this, the investing superannuation fund will need to determine whether or not the dividends that are distributed by the firm would be regarded as exceptional income by the fund.

According to the provisions of Section 273 of the 1936 Act, any dividends distributed by a private corporation to investors who are in compliance with superannuation funds would be considered to be special income and will be subject to a tax rate of 47%.

On the other hand, this presumption may be overturned if the Commissioner of Taxation determines that it would be unfair to count dividends as special income under the circumstances. In order to properly exercise this discretion, the Commissioner is required by section 273(2) to take into account the following factors:

• the value of the company shares held by the superannuation fund, which are considered assets of the fund;
• the amount that the company's shares cost the superannuation fund before they were sold to pay the dividend;
• the annual percentage rate of the dividend that the corporation contributes to the pension plan;
• whether or not the corporation has previously distributed dividends on other shares of the company's stock, and if so, the rate at which those dividends were distributed;
• whether the corporation has granted any shares to the superannuation fund as payment for a dividend it has paid, and if so, under what terms; and
• any additional information that the commissioner deems pertinent.

The Australian Tax Office has released a Draft Taxation Ruling (TR 2000/D11), which provides direction for how the Commissioner will utilise the discretion afforded to him.

According to the Ruling (at paragraph 31), in the end, it will be the person who prepares the tax return of the superannuation fund as well as the taxation officer who will be responsible for taking into consideration all of the issues and weighing them in order to form an opinion on the appropriate tax rate.