SMSF for Investing in Property
Build or expand your property portfolio with your SMSF.
SMSF for Investing in Property
Using a SMSF can be a very useful and tax effective vehicle in which to purchase property. There are however a number of special rules that trustees of the superannuation fund need to be aware of to ensure that the fund complies with the regulatory guidelines.
The following is a summary of the various forms of property that can be invested in a SMSF and some tips to ensure that the purchase of the property is suitable and correctly implemented:
A residential property can be purchased within a SMSF and a number of our clients do just that.
It is important to note that any residential property held by a SMSF must meet the Sole Purpose test. Residential properties cannot be purchased from a member of the fund or a related party. In addition to this a residential property owned within an SMSF cannot be rented to or used by a member of the fund or a related party.
Another common form of property that our clients purchase within their SMSFs is commercial property.
Unlike residential properties, commercial property (or business real property) can be leased from and leased to a related party.
Valuations will be required to ensure that all transactions (both purchase and lease transactions) are on an arm’s length basis (market value).
Borrowing to Purchase Property
An SMSF can also use a limited recourse borrowing arrangement to purchase an asset. This asset is held in a separate borrowing trust until such time as the debt is extinguished. As this is a limited recourse borrowing arrangement should the loan default then only those assets held in the borrowing trust are at risk and there is no further recourse to the other assets held in the SMSF.
SMSF for Investing in Property FAQ's
Can I or my relatives stay in any residential properties within my SMSF?
No. Property must be maintained within the SMSF purely for investment purposes only.
What are the advantages to having property within an SMSF?
Having property in your SMSF can have the following benefits:
- Asset protection
- Reduced tax on earnings
- Reduced tax on capital gains
Can I use my SMSF to buy a commercial property to lease back through my business?
Yes you can, however there are particular criteria you would need to satisfy:
- The commercial property would need to comply with the sole purpose test
- The terms of the lease agreement would have to be commercially competitive
- The lease agreement terms must be adhered to and the transactions must be at arms length, meaning that investment transactions must be conducted on a commercial basis as if there was no relationship between the parties.
- Valuations for the commercial property would need to be done on a regular basis (every 3 years) to comply with legislation.
How does a Limited Recourse Borrowing Arrangement Work?
A limited recourse borrowing is an SMSF loan. The loaned funds can be used to purchase an asset held in a separate trust. To learn more about Limited Recourse Borrowing Arrangements, visit Grow Your Super.
What is a related party?
The ATO defines a 'related party' as follows:
- All members of your fund
- Associates of fund members, which includes,
- The relatives of each member
- The business partners of each member
- Any spouse or child of those business partners, any company a member or their associates control or influence and any trust the member or their associates control.
A relative of a member means any of the following:
- A parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or their spouse
- A spouse of any individual specified above.
For further information regarding purchasing property within a new or existing self managed superannuation fund please contact our office to discuss your circumstances with our SMSF Specialist Advisors.