Investing through your SMSF can turn out to be a lucrative venture and if you are spot on with your declared investment strategy, you can reap great many benefits over the short and the long term. However, everything in life for which the word ‘lucrative’ rings true is also beset with traps. Let us figure out the top traps of SMSF-enabled investments.
Arm’s length transactions
Unless you have business real estate in mind, avoid purchasing property from members. Even in cases of premises bought for the business ventures, you will have to ensure compliance with the protocols of arm’s length transactions (related party transactions). The fund must pay market value for the property and the purchasing idea should be consistent with the declared investment strategy.
The installment warrant provision introduced in the year 2007 made it possible for SMSFs to borrow for property acquisitions. However, to this date, the rules are particularly clear about the structure which may be used for the purpose. As a first, it is of paramount importance to open a bare trust which takes up the legal ownership of the property.
On the payment of the final sum, the fund must take the owner’s title. If there is a goof up in following the protocols, the fund will not find itself exempt from the general prohibition which presides over the domain of LRBA.
Repairs versus improvements
When you buy a property through your SMSF, the regulations restrict you from making improvements to the property unless you follow specific corollaries attached to the same. You can make repairs but the idea must be to restore the property to its original condition rather than making changes to enhance its structural or cosmetic brilliance.
Keeping the same line of thinking, it is not hard to decipher that properties bought through SMSF cannot be subdivided as it would mean an alteration in the original title.
In-house asset rules
As a notable aside, SMSFs must also keep a vigil on the in-house asset rules and their thorough implementation. If your SMSF gets a chance to invest in a property held by close people, you must first reach out to the nearest professional and figure out whether it is possible without a prospective breach of the guidelines.