SMSF Property Investment Requirements
Investing in property through a self-managed super fund (SMSF) has been growing rapidly. An SMSF is a private superannuation fund that can have more than one member. The fund members are all responsible for ensuring compliance with relevant laws and regulations.
Before buying property through your SMSF, you must be aware of the specific rules and regulations that apply. Below is a general overview of what you must know before diving in.
SMSF Property Investment Rules:
- The subject property has to meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- The subject property cannot be acquired from a related party of a member
- The subject property can not be lived in by a fund member or any fund members’ related parties
- The subject property can not be rented by a fund member or any fund members’ related parties
While a property cannot be rented or lived in by a fund member or their relatives, most SMSFs are entitled to purchase their business premises, allowing trustees to pay rent directly to their SMSF at the market rate. This is particularly appealing to business owners.
For detailed info, check out the ATO – https://www.ato.gov.au/Super/Self-managed-super-funds/
SMSF Property Loan
An SMSF can borrow money to buy a property through a limited recourse borrowing arrangement (LRBA).
A separate property trust and trustee is established outside the SMSF structure, in order to ‘limit the recourse’ of the lender. All the income and expenses of the property go through the super fund’s bank account and the super fund must meet all loan repayments. The lenders will only have recourse to the property held in the separate trust if the super fund fails to do this, and will not have access to any remaining assets of the super fund.
In general, a SMSF fund must have a minimum balance of $150,000+ to be able to purchase a property, and annually, it needs to contribute at least $15,000. Moreover, most banks require an SMSF to have a deposit of at least 30 percent of the value of the property, and they often charge a higher interest rate.
For further loan inquiries, please speak to a qualified mortgage broker.
Can we start an SMSF property development project?
Short answer: Yes, but there are some issues with superannuation compliance when deciding whether or not to develop a property in your SMSF.
The question is whether the property development meets the sole purpose test under the SISA.
It was previously interpreted by the ATO that the sole purpose test was violated if a fund is “running a business” as part of its investment strategy. According to the general view, if a superannuation fund is conducting business, it is not administered for the sole purpose of providing benefits to its members and beneficiaries.
While the current ATO view is that the fact that activities undertaken by an SMSF trustee are considered business activities for income tax purposes does not necessarily mean that the trustee is in violation of the regulatory provisions. Trustees should be aware that these activities will be scrutinized under the sole purpose test and other regulatory provisions.
Make sure not to be pushed into making property purchases for an SMSF unless you have spoken to relevant experts and sought professional advice as well as done your own research and due diligence.