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SMSF and Property

smsf property

Self-Managed Superannuation Funds (SMSFs) have become an attractive option for investors looking to diversify their retirement portfolios through property investment. Recent data from the Australian Taxation Office (ATO) indicates that approximately 9.3% of SMSF assets are allocated to non-residential property, while 5.1% are invested in residential property. However, navigating SMSF property investments can be complex and requires careful consideration.

The Sole Purpose Test

The cornerstone of SMSF investments is the sole purpose test. This fundamental rule stipulates that all investments, including property, must be acquired solely to provide retirement benefits to fund members or their dependents. While minor incidental benefits are permissible under certain conditions, they must not compromise the SMSF’s primary objective. The ATO’s SMSFR 2008/2 ruling emphasises that trustees must evaluate the overall context to ensure any incidental benefits remain insignificant and do not violate the sole purpose test.

Types of Property Investments

SMSFs can invest in both residential and commercial properties:

  1. Residential Properties: Houses and apartments can generate rental income for the fund.
  2. Commercial Properties: These offer more flexibility and can be an exception to in-house asset rules and related party acquisitions.

For business owners, purchasing their business premises through an SMSF and leasing it back to the business at market rates can provide significant financial advantages. However, the property must pass the “business use test,” ensuring it’s used exclusively for business purposes.

Limited Recourse Borrowing Arrangements (LRBAs)

Given the high cost of property, many SMSFs utilise LRBAs to invest. This arrangement allows an SMSF to borrow funds to purchase a single acquirable asset (or identical assets of equal value). The asset must be held in a separate bare trust, limiting the SMSF’s liability to that specific asset and protecting other fund assets.

Regulatory Concerns

The ATO has expressed concerns about “one-stop shops” where advisers have relationships with developers or real estate agents, potentially leading to conflicts of interest. Both the ATO and the Australian Securities and Investments Commission (ASIC) are scrutinising these arrangements to protect investors from poor advice.

So, if you are considering establishing, or have been advised to establish, an SMSF just to invest in residential property, you probably need to seek financial advice.

Key Considerations for SMSF Property Investment

  • Ensure all investments align with the fund’s investment strategy and comply with regulations.
  • Be cautious of advice to establish an SMSF solely for residential property investment.
  • Understand the restrictions on personal use of SMSF-owned properties.
  • Consider the complexities of overseas property investments through SMSFs.
  • Be aware of limitations on borrowing for land purchase and construction.
  • Recognise that while family members can be added to an SMSF, they cannot live in properties owned by the fund.

Before embarking on SMSF property investment, it’s crucial to seek professional financial advice to navigate the complexities and ensure compliance with all relevant regulations.

SMSF Property Investment: Common Questions Answered

Q1: Can I purchase a property from my SMSF for personal use?

A: Yes, but with conditions. The transaction must be at market value, conducted at arm’s length, and you may need an independent valuation. Remember, this changes the asset ownership from your SMSF to you personally.

Q2: Is it possible to transfer my existing investment property to my SMSF?

A: It depends on the property type. Commercial, farming, or business real property can be transferred at arm’s length. However, residential property generally cannot be acquired from related parties, including SMSF members.

Q3: Upon retirement, can I reside in a property owned by my SMSF?

A: Not while the SMSF owns it. However, you could potentially transfer the property out of the SMSF to yourself as part of a benefit payment, after which you could live in it.

Q4: Are international property investments allowed for SMSFs?

A: Yes, but it’s complex. Direct investment using SMSF funds is possible, but borrowing for overseas property is challenging. Consider the difficulties of managing foreign tenants and complying with international laws. Ensure it aligns with your fund’s investment strategy.

Q5: Can an SMSF purchase land and construct a house?

A: You can buy land outright with SMSF funds. However, borrowing to both buy land and build is not permitted as it would change the nature of the asset. If using only SMSF funds, ensure it meets the sole purpose test and fits your investment strategy.

Q6: Is it possible to include family members in an SMSF for joint property investment?

A: Yes, family members can join your SMSF. However, any property purchased would belong to the SMSF, and no member or related party could use it for personal purposes, including residence.

Q7: Can SMSF funds be used to furnish a property owned by the fund?

A: Yes, SMSF funds can purchase furniture for a fund-owned property. However, borrowed funds cannot be used for this purpose.

Q8: Is it permissible to use SMSF funds to build a rental property on my personal land?

A: Generally, no. If the structure is built on your personal property, it would belong to you, not the SMSF. This arrangement would likely breach SMSF regulations regarding related party transactions and the sole purpose test.

Q9: Are there limits on how much of my SMSF can be invested in property?

A: There’s no specific limit, but your SMSF’s investment strategy should justify the allocation. Consider diversification, liquidity needs, and the best interests of fund members.

Remember, SMSF property investment is complex. Always seek professional advice to ensure compliance with current regulations and to make informed decisions aligned with your retirement goals.

Florence is an expert in Self-Managed Superannuation Fund’s and partners with our clients to assist them with their compliance and administration obligations. Florence has over 10 years of experience in the industry. A registered financial planner and licensed mortgage broker, she focuses on assisting small and large businesses plan for long term growth and wealth generation. Florence is not your ‘average financial adviser.’ She is one of our most sought-after and trusted adviser, with her skills recognised by both clients and her industry peers. Her key focus is working with clients individually to understand their needs, educating and giving them control, security and the freedom to advance themselves. She believes that hard work and a disciplined strategy gets results for clients and she works with them on a plan that suits. However, her most notable gift is the ability to transform static spreadsheets into dynamic pictures that help clients understand and futureproof their plans.

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