Benefits of Buying Property through an SMSF

Buying property with SMSF funds has enormous advantages and can certainly help to increase a member’s wealth in relation to their retirement. It is wise to tread carefully and ensure you obtain advice from your SMSF Specialist or Licensed Financial Adviser to avoid any legal or compliance issues.

It is important in managing an SMSF to ensure you review the fund’s trust deed and review and update the investment strategy when you decide on a property you want the fund to purchase.

Can I Purchase Property Using My SMSF?

Yes. Many trustees see the benefit of property purchased through an SMSF as being part of a diversified investment strategy to meet the SMSF’s investment objectives. Generally, purchasing a residential or commercial property through an SMSF is seen as an asset which will increase in value over the medium to long term.

Why Would I Purchase a Property Using My SMSF?

Advantages for an SMSF to purchase property include:

  • Tax Concessions
  • Asset Protection
  • Eligibility for Small Business CGT concessions
  • Diversification of Assets
  • Increasing a member’s balance

Tax Concessions

The SMSF is taxed at 15% which is much lower than the top personal tax rate of 47% (includes medicare) or company tax of 30%. Property management expenses are tax deductible to the fund reducing the fund’s tax liability.  Capital gains, on sale of the property, are concessionally taxed at 10% if the property is held longer than 12 months. The capital gains and income tax are further reduced to be as low as nil if all members are in pension mode.

Asset Protection

A SMSF is a very safe vehicle which can be used for asset protection. A SMSF member who is subject to bankruptcy or creditor proceedings can avoid the bankruptcy trustee or creditor from accessing their superannuation balance.  The assets are legally owned by the SMSF and not by the member.  Therefore, a property owned by a SMSF is protected and generally cannot be recovered by a bankruptcy trustee or creditor.   However, there are claw back provisions in the Bankruptcy Act which need to be considered.

Eligibility for Small Business CGT Concessions

A SMSF member may have access to tax breaks with regard to the “small business CGT” (SBCGT) concessions. This could mean you don’t have to pay tax on some or all of the money you make when you sell a business asset. One of the conditions is that your total net assets have to be less than $6 million. But if the business property is owned by your SMSF, it doesn’t count towards the $6 million limit. This could potentially allow you the opportunity to access those tax breaks. Consult your SMSF expert or tax adviser if you think you could qualify for a SBCGT concession.

Diversification of Assets

Real estate is one of the many types of investments that can help mitigate the risk of investment losses. By diversifying assets, investors can often achieve consistent returns over the long term.

Increasing a Member’s Balance

Because of contribution limits, there are restrictions on how much a member’s super balance can be increased. Nonetheless, receiving rent and making capital gains from selling property can help add more money to the super account, thus boosting the member’s balance. It is commonly expected that property held for a longer period will yield higher rental income and capital returns. Additionally, utilising a “Limited Recourse Borrowing Arrangement” can further assist in growing a member’s super balance.

What should Be considered when SMSFs buy an investment property?

What, how and from whom the property is to be purchased are important key elements to consider when buying a property investment through an SMSF.

What Type of SMSF Property Investment Should I Purchase?

Should it be residential or commercial or vacant land?

Usually, purchasing commercial property or business real estate is a popular choice for SMSFs due to encouragement from superannuation laws. While residential property is gaining popularity, business properties have historically been more appealing to SMSFs. It is rare for vacant land to be held in an SMSF, but it is not prohibited by superannuation laws. Developing the land may be an option, but navigating the complexities of the superannuation laws can make the process difficult.

How to Purchase SMSF Property?

When utilising SMSF for property investments, the trustees must decide on the source of funds for the property acquisition. Funding options for the purchase can involve member and/or employer contributions, transfers from other funds, liquidating current assets, or potentially obtaining a loan through a LRBA. Additional possibilities include co-owning property with other individuals through pooling cash in a unit trust or entering into a tenants-in-common agreement.

From Whom is the SMSF Property Being Purchased?

The primary obligation is to adhere to the sole purpose test, which dictates that SMSF trustees must guarantee that investment decisions are made solely to provide retirement benefits to fund members.

Purchasing property from a member or a related party 

“Business real property” (BRP) can be purchased from a member of the SMSF. BRP has a different connation to just business or commercial property. The definition of BRP means the property must be used wholly or exclusively in a business or businesses.

Generally, residential property or vacant land is unable to be purchased from a member or other related party.  However, if the property is BRP it potentially can be.

Other considerations include purchasing the property at market value and leasing to a related party must be done on commercial terms and conditions.

Example – Vacant land which forms part of the member’s trading stock in relation to their property development business can be ‘business real property’ and thus able to be purchased by their SMSF.

Example –The SMSF purchases a warehouse from a Henry, a member of the Fund at market value. The warehouse includes a small private residence which is rented by Fred who is not a related party of the SMSF. The warehouse is used 100% in the business carried out by Henry. The warehouse was and remains leased to Henry at market value and Fred continues to lease the residence. Formal leases were in place and transferred to the SMSF when the property was purchased.

Can the SMSF purchase the property? No as the property is being purchased from a related party and it is not being used wholly and exclusively in a business due to the private residence which is part of the property.

The same facts apply but Fred is a security guard and as part of his employment contract he is required to be on call and available 24/7.

Does this change the outcome?  Potentially, as it could be argued that the use of the residence is incidental and relevant to that business.

Purchasing Property from an unrelated party

Business or residential property purchased from an unrelated party has a lot of advantages from a compliance perspective.  There is no prohibition on purchasing residential, commercial or vacant land from an unrelated party provided it passes the sole purpose test. Furthermore, it is assumed the property is being purchased at market value as the parties will try to get the best deal for themselves. Similarly, where the tenant is unrelated the rent is considered to be at market value.

Tip – A related party can be a member or relative of a member (including son, daughter, spouse, mother, father, grandparent, aunty, uncle, niece, nephew) or a unit trust/company where the member and Part 8 associates (can be a relative of a member, a partner of a member, trustee of a unit trust)  can collectively control a unit trust or sufficiently influence a company.

Tip – An unrelated party is a person or entity who is not a related party. Not a member or relative of a member or a person or persons who can collectively control a unit trust or sufficiently influence a company.

Using an SMSF Loan to Purchase an Investment Property with an SMSF

A limited recourse borrowing arrangement (LRBA) can be used to purchase a property through a self-managed superannuation fund.

If deciding to use a LRBA the ownership of the property must legally be held by a separate holding or bare trustee. The SMSF must ensure the property loan is taken out by the self managed super fund and not the holding trust. The deposit must be made by the self-managed super fund.  All property expenses must be made directly from the fund’s bank account.

On the sale of a property the transfer of the property from the holding trust back to the SMSF needs to be considered.

A SMSF specialist should be consulted if considering using a LRBA as part of buying property through your SMSF.

Other Considerations for Self-Managed Super Fund (SMSF) Buying Investment Properties

When purchasing property through an SMSF the trustee needs to ensure the title is correctly transferred to the trustee of the SMSF. Each state has specific laws in relation to recording the title.  It is important to ensure compliance with state laws. If borrowing, using an LRBA, ensure the holding or bare trust is the legal owner of the property but again check the relevant state laws.

GST should always be reviewed as the SMSF may need to register for GST or wants to register for GST. Note that GST does not normally apply to residential property. There are some limited circumstances when GST may apply to a residential property. GST is beyond the scope of this paper so please ensure you seek advice from your tax adviser.

Key-Takeaways – Benefits of using an SMSF to invest in the Property Market 

  • Tax advantages including potentially reducing capital gains to nil when the SMSF sells the property
  • Property in your SMSF can be residential, vacant land or a business/commercial property
  • Property held within an SMSF can be leased to a related party if it is business real property
  • If the Fund leases business real property to a related party, it must be at market value
  • Property can provide diversification in a SMSF investment portfolio
  • A LRBA can be used to purchase property in a SMSF
  • Using your SMSF to purchase a property may provide asset protection
  •  Vacant land owned by a SMSF can be purchased from a related party under certain circumstances
  •  Property owned by a member can be transferred to a SMSF if it is business real property

Contact Us 

If you are considering whether the purchase of a property by your SMSF is right for you and want to understand  how to structure the purchase to ensure compliance with the superannuation laws please reach out to one of our friendly team and we will be happy to help you understand the rules and regulations involved in purchasing or transferring property to your SMSF.

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