Buying a property off your Self Managed Super Funds (SMSF) is a common trend among Australians, and has been popular since the year 2007 when Self Managed Super Funds were allowed to be borrowed for buying assets. Figures by the Australian Taxation Office (ATO) reflect that it was ever since then, that a steady increase of about 516,925 SMSFs was witnessed in Australia as of 30 June 2017.
However, you must understand that making an investment in property with super funds is not simple. Hence, you will need to do your research well on the procedures involved. This option is most suitable for people who still have 15-20 years till retirement because they then they have more time to make contributions and sufficient amount of balance for making a deposit.
There are several things that you need to know before going ahead and taking the plunge. Hence, here are a few suggestions that will help you when you plan to purchase property off SMSFs.
What to know before investing
An Investment strategy is a prime step prior to making any type of investment. The same can be said for SMSFs too, as it brings into focus the objectives of your fund’s investment while also helping you determine the types of investments you can make with your funds.
When creating an investment strategy for investments in property, personal or business there are certain considerations to be made like-
- Personal information of all fund members like their age and risk tolerance
- Ease of conversion of fund assets to cash to meet fund expenses.
- Ability to pay benefits with the funds upon retirement and other costs incurred by it
- Requirements of the members
There are certain requirements and rules that need to be kept in mind when investing in property with SMSFs. The reason why most people set-up SMSFs is for the tax benefits that they receive, an attractive rate of 15% annually. However, for this tax rate to be put in place, investors require to strictly follows certain guidelines which are as stated below.
- The property that is being purchased must solely serve the purpose of offering retirement benefits to the fund members. It must not be meant for personal enjoyment.
- You cannot acquire the property in question from a related party.
- A fund member and their related parties may not live in the property.
- Fund members or related parties of the fund members cannot rent the property.
If in any case, fund members are unable to comply with any of the following restrictions, then it may lead to imposition of penalties, disqualification as a trustee, or even prosecution. To elaborate on the restrictions, here, ‘related parties’ refers to
- Your relatives,
- Business partners of each member,
- a spouse or child,
- any company controlled by the fund member or their associates
- any trust controlled by a fund member or their associates.
- Employers contributing to your super fund for the benefit of a member
- business partners and companies or trusts controlled by the employer ; and
- Companies and trusts that control the employer.
In case of a business administered through an SMSF, the rules and restrictions remain the same. However , there are additional requirements, which are as stated below.
- The business must be allowed under the trust deed; and
- The business should function only with the objective of catering to retirement benefits of fund members.
In case of investment in business property, it must be made on a commercial arm’s length, which means that both parties involved in the deal must not be subject to any pressure or coercion from the other party.
Sole Purpose Test
Other than the requirements cited above, to be eligible for tax benefits, your SMSF should be able to meet the sole purpose test. The test is to ensure that your funds are maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.
In this case too, if you happen to defy the sole purpose test you risk the chance of losing concessional tax treatment and most importantly could face civil and criminal penalties. You may fail this test if perchance you happen to offer a pre-retirement benefit to someone or if you or anyone else, directly or indirectly, gets a financial benefit when making investment decisions and arrangements. This excludes doing so to increase the return to your fund.
Your borrowing power of SMSF for investment in property must be done under rigid conditions, also known as Limited Recourse Borrowing Arrangement (LRBA). Furthermore, your SMSF fund can only borrow money under limited circumstances, which are as follows.
- You cannot borrow more than 10% of your funds total assets if you are borrowing for a maximum of 90 days to meet benefit payments due to members or to meet an outstanding surcharge liability
- borrowing money for a maximum of seven days to cover the settlement of security transactions if the borrowing does not exceed 10% of your fund’s total assets
- borrowing using instalment warrants or limited recourse borrowing arrangements that meet certain conditions.
A limited recourse borrowing arrangement can be used by a trustee for funding the purchase of a single asset, in a separate trust.
Keep in mind that you can only use the limited recourse borrowing arrangement to purchase either a residential or commercial property. Other than that, LRBA allows the investor to cover any expense that is related to the property purchase like stamp duty, brokerage, and conveyancing. However, LRBA cannot be used to purchase vacant land and then build a property on the land as this would change the nature and characteristics of the acquired asset.
If you are planning to invest in property through your SMSF you need to do your research well. Buying property through Self Managed Super Funds does not suit everyone, owing to the number of requirements involved. However, if you still think that it’s worth a try, and you might have your doubts, speak to a professional who could help you ensure that your investments are in line with the laws surrounding it. After all you would not want to be on the wrong side of the law, especially when you are not even aware of what you are doing.
Furthermore, ensure to check your insurance options for security, prior to closing your super account, to avoid the hassles of having to pay higher premiums or be limited by age and health issues when buying a new policy at an older age.
Credit Hub can help you in setting up your SMSF account and simplify the complete process of buying your property through Self Managed Super Fund. Get in touch with our advisors to know how we can help.