Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 120

Property excitement, a Saturday auction and an SMSF

If you want to save some money and heartache, there are some potential solutions for those who jump the gun with SMSF property investing.

The scenario

It’s Saturday morning, and James and Marie, armed with some awareness of SMSFs, attend an auction. They are convinced the property will make a perfect investment for that SMSF they keep meaning to set up. They make the winning bid. They then sign the contract and hand over a personal cheque for the deposit. On Monday morning, James and Marie call their adviser requesting that an SMSF be set up straightaway.

The SMSF must already exist

Unfortunately for James and Marie, there are some major issues with their ‘I’m sure it will all be fine’ approach to SMSF property investing. James and Marie’s first and most pressing problem is that under general law, it is not possible for an asset to be acquired by an entity that does not exist yet.

As James and Marie had not already set up their fund, they will be treated as the legal purchasers in their personal capacity and will be liable for completing the transaction and paying any transaction costs, including stamp duty. If James and Marie were then able to negotiate with the vendor to amend the sale contract to name the corporate trustee of their SMSF as the purchaser of the property, they will then have entered into a sub-sale arrangement. In this case, James and Marie would incur ad valorem stamp duty on the original sale arrangement and the corporate trustee of their fund would also incur ad valorem stamp duty on the second arrangement to transfer the property into the fund. As a result, depending on which state or territory the property is located and any stamp duty concessions available, James and Marie may effectively incur double stamp duty.

Potential issues when buying in the wrong name

Were James and Marie to proceed with this course of action they would also be faced with a number of other issues.

Prohibition on acquiring assets from related parties – If James and Marie were to change the name of the purchaser to their corporate trustee of their SMSF, it could be argued that unless the property was a Business Real Property (BRP) they will have breached the prohibition on trustees acquiring an asset from a related party, as the corporate trustee will have acquired the property from themselves.

The deposit – Where the property was a BRP, James and Marie also need to consider what they want to happen with the deposit. They could either treat the deposit as a contribution to the fund or arrange for the fund to reimburse the deposit back to them. However, a reimbursement may take some time depending on how long it takes to set up the fund and then transfer monies via rollovers. This may cause problems with the requirement that a reimbursement be paid immediately to avoid it being treated as a borrowing by the fund.

The potential solution

To resolve their double stamp duty issue James and Marie could consider rescinding or annulling the original contract and then entering into a new contract naming the corporate trustee as the purchaser once the fund was properly established. While in this case stamp duty would still generally apply to the rescinded contract, concessions may apply to exempt it from stamp duty in certain situations.

For example, in NSW a contract for the transfer of dutiable property that is subsequently annulled or rescinded will be exempt from stamp duty (or eligible for a refund) where the purchaser under the original contract and the purchaser under the new contract are related parties. In this case, a related party of a person includes a trustee of a trust (other than a public unit trust) of which the person is a beneficiary. Therefore, assuming NSW rules, if James and Marie were able to rescind the original contract and then enter into a new contract with the corporate trustee of their fund as the purchaser, ad valorem stamp duty would generally only apply to the new contract and not the original contract.

Annulling the contract would also avoid any problems around the acquisition of assets from related party rules as it would involve the fund acquiring the asset from the unrelated vendor. However, the deposit would likely need to be refunded by the vendor and then paid by the fund. In this case, the timing of the arrangement should ensure the fund will have the necessary cash at the bank to fund the deposit. Finally, any arrangement to annul or rescind a contract will require the consent of the vendor, who may not agree. Alternatively, where the vendor did consent, James and Marie would also need to consider the risk that the vendor could then put the property back to market or try and negotiate for a higher sale price. Given the complex stamp duty rules that apply in the different states and territories and all the additional issues that will need to be considered and negotiated, it will be essential that a client seek specialist legal advice before entering into any such arrangement.

The ‘long shot’ solution

An alternative solution could be for James and Marie to complete the purchase as per normal and to then take the view that they had already established the required SMSF trust arrangement at the time of the auction. That is, they could argue they had previously verbally expressed their intention to establish an SMSF and appoint themselves as trustee, and they were acting as individual trustees at the auction, and they made the initial contribution to establish the trust by paying the deposit.

The benefit of this is that James and Marie will not have entered into a sub-sale arrangement and therefore they will avoid having to pay double stamp duty. While it may be technically possible to create an SMSF by verbal declaration under general law, clients generally don’t wake up on Saturday mornings intending to do so. It is also highly likely that such an approach would not be viewed positively by the relevant state revenue authorities and could also cause issues with the fund’s auditor and the ATO. In addition, such an arrangement would likely set the fund up for legal problems should there ever be a dispute in relation to the fund’s establishment or governing rules in the future.

 

Craig Day is Executive Manager, Technical Services at Colonial First State. This article is for general information only and readers should seek professional advice on their personal circumstances before taking action.

 

  •   30 July 2015
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Can your SMSF buy a retirement home for you now?

Clime time: Asset allocation decisions for SMSFs

How will SMSF trustees handle the new super tax proposal?

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Latest Updates

Shares

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Superannuation

When you can withdraw your super

You can’t freely withdraw your super before 65. You need to meet certain legal conditions tied to your age, whether you’ve retired, or if you're using a transition to retirement option. 

Retirement

A national guide to concession entitlements

Navigating retirement concessions is unnecessarily complex. This outlines a new project to help older Australians find what they’re entitled to - quickly, clearly, and with less stress. 

Property

The psychology of REIT investing

Market shocks and rallies test every investor’s resolve. This explores practical strategies to stay grounded - resisting panic in downturns and FOMO in booms - while focusing on long-term returns. 

Fixed interest

Bonds are copping a bad rap

Bonds have had a tough few years and many investors are turning to other assets to diversify their portfolios. However, bonds can still play a valuable role as a source of income and risk mitigation.

Strategy

Is it time to fire the consultants?

The NSW government is cutting the use of consultants. Universities have also been criticized for relying on consultants as cover for restructuring plans. But are consultants really the problem they're made out to be?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.