Be aware of investing in property through SMSFs

by TK
property in SMSF

Investing in property may seem very straightforward and less risky. Hence, many Australians love to invest in real estate. Additionally, investment properties are tangible, offers diversification, tax benefits, can provide a good income and comparatively strong capital growth.

However, the statistics based on the information on FY 2015-16 released by ATO identified that around 2,097,392 Australians own one or more investment properties. It is approximately 8.7% of the total population of Australia.

The numbers may not say it all and can vary based on the various factors. Nevertheless, undeniably real estate is the most popular type of investment option in Australia.

Often the benefits of investing in property can be amplified when held within super. The changes to borrowing within Self-Managed Super Funds (SMSFs) over the past few years have widened the ability to access property investment through super significantly.  

There are many rules governing borrowing within SMSFs to purchase a property. It is highly regulated and may not be a straightforward proposition and suitable for everyone. Understanding the associated rules is very important to ensure that your fund remains compliant and avoid possible penalties. 

The type of property can be purchased within an SMSF:

You can purchase commercial, industrial or residential property within your SMSF. However, each has different regulatory requirements.

Residential Property-

Any residential property purchased through SMSF must:

  • Meet the ‘sole purpose test’. It means that the fund needs to be maintained for the sole purpose of providing retirement benefits to its members, or their dependants if a member dies before retirement.
  • Not be attained from a related party to the member such as a spouse, family member or business partner etc.
  • Not be rented or lived in by a member or party related to the member.

Commercial or Industrial Property (Business Real Property)

Similarly, any investment in a commercial or industrial property must also meet the sole purpose test. You can rent or purchase a commercial or industrial property (business real property) from your SMSF. However, the transactions should be on arm’s length commercial terms.

Borrowing rules for SMSF

Your SMSF can borrow to purchase a property through the “limited recourse borrowing arrangement (LRBA)”. Be aware that there are restrictive rules for acquiring property-using borrowings through SMSF.

An SMSF can use LRBA to purchase a vacant block of land. However, it cannot purchase a vacant land using LRBA and then use some of the borrowed money to build a residential property on the land. It will breach the ‘single acquirable asset rule’.

Under this rule, a house and land package would be treated as a single acquirable if it is purchased together in the one transaction as a single acquirable asset, where the asset is identified upfront as vacant land with a completed house on it.

Many property specialists may have a vested interest in selling these kinds of investments to SMSF members without having an accurate understanding of a member’s situation. Therefore, cautions should be taken while investing in property through your SMSF. Or else it could be a costly mistake.  

Investing in property through SMSF is not advisable for everyone. Before entering into any contract, always seek advice from a licensed financial planner or authorised SMSF specialist.

Note: *The above information provided is general in nature. It is not to be relied upon as personal financial advice. As it has not considered your personal circumstances, needs or objectives.

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