Property Investment in a Self-Managed Super Fund

Property Investment in a Self-Managed Super Fund

Property Investment in a Self-Managed Super Fund: Top Questions Answered

Compared to other superannuation funds, a self-managed superannuation fund or SMSF can invest in almost anything. An SMSF can hold Australian and international shares, gold and silver, cash and term deposits, and even cryptocurrencies, as long as it meets the “sole purpose test” and abides by a particular set of rules.

Investing in property through an SMSF has been a popular choice, mostly since SMSFs are allowed to borrow money to fund the purchase of an investment property.

In this article, we will answer the common questions that our SMSF specialists receive from clients who are looking to hold real estate in their super fund.

How can I use my SMSF to buy a property investment?

There are two ways you can use your SMSF to invest in a property: First, you can outright buy a property without borrowing money if your super has enough funds to make a purchase. It is important, however, to make sure that the property is part of an investment strategy for your retirement.

The second option is for the SMSF to take out a loan to buy an investment property. This loan is called a limited recourse borrowing arrangement (LRBA). In this arrangement, you are required to set up a separate trust so that the other assets in the SMSF are protected. If the SMSF defaults on the loan, the fund is not allowed to sell other assets that it holds to pay back the loan.

LRBAs are long-term investments so you should take careful consideration whether your super fund can maintain the repayments and fees over the term of the loan.

What are the SMSF rules for property investment?

Like with every investment that you would make with your SMSF, due diligence is a must. Since you are responsible for managing your super fund, it’s important that you understand the rules and conditions relevant to purchasing property through your SMSF.

ATO rules on Property Investments:

  • The property (like all SMSF investments) must pass the sole purpose test. This means the purpose of the fund should only be to provide retirement benefits to SMSF members.
  • The property must not be purchased from a member’s relative or related parties.
  • It is also not allowed for the property to be rented out or lived in by the members or any of their related parties.
  • If the SMSF purchased a commercial property, the said property can be leased to an SMSF member or related parties so long as they use it only for business purposes. The lease should be at the market rate and should be paid in full on each due date. Note that the SMSF should not be used to invest in the actual business.

Failure to comply with these rules will lead to the ATO imposing significant penalties to the SMSF and possible disqualification of the fund’s trustees.

What are the things I should consider in property investment for my SMSF?

Investing in property through your SMSF is a good long-term investment strategy as it can provide a solid return on investment and also offers some tax benefits. However, you must keep in mind that this does not come without risk. That’s why it’s vital to take into consideration a few things (like the ones listed below) before deciding to invest in real estate using your SMSF.

  • Is property investment in accordance with the fund’s investment objectives and strategy? 
  • Do you have funds to cover upfront expenses? Loan-to-value ratios are usually lower for SMSFs wanting to purchase a property so you want to make sure that you have the funds to cover costs such as deposits.
  • Does the SMSF have money to pay for renovations and other improvements on the property? You are not allowed to use the funds from the loan to pay for the significant renovations in the property, instead, this should come from the money that’s already in the fund.
  • Do you have good cash flow? Loan repayments must only come from your SMSF, that’s why you have to ensure that the fund always has cash available to cover the loan payments and other related costs. 

What are the borrowing criteria for SMSFs?

Compared to property loans taken out by an individual, rules are much stricter for SMSFs. In addition, the loan also comes with higher costs, which is another thing that you should think about when determining if buying property is the right investment strategy.

It’s worth mentioning again that loan repayments should only come from the SMSF. The repayments could be funded through rental income on the property and contributions to the fund.

While requirements from lenders vary, generally, the SMSF should have at least 30% of the property value to cover costs and other fees. Also, most lenders would not approve loans to super funds that have a balance below $200,000.

For additional information about the costs involved and tax implications of SMSF Property Investment, please read our previous article.

Purchasing property through your SMSF comes with tedious rules and obligations that you should comply with. A breach of these regulations, even if unintentional, will end up with you being held responsible by the Tax Office. If you want to be sure that your SMSF continues to be compliant it’s a good idea to seek advice from qualified specialists to help you properly manage your retirement savings.

If you have questions about property investment in your SMSF or need help managing your fund,  our team here at SMSF Australia is here to help.

Share this post