Using a Self-Managed Super Fund to purchase property
Posted on July 08, 2024
The trend of using a Self-Managed Super Fund (SMSF) to purchase property is gaining in popularity as the number of SMSFs being established has increased in recent years. This offers the public an alternate way to enter the heated property market.
The general rule
Generally, you cannot use your SMSF to buy a house for personal use as it will breach the ‘sole purpose test’. However, you can use your SMSF to purchase an investment property.
There are additional requirements for using a SMSF to purchase a property. For example, the SMSF is prohibited from purchasing a residential investment property from a member or a related party of a fund member, for example parents, children and other relatives.
Commercial investment property
A SMSF can purchase a commercial investment property, which is used solely for business purposes, from a member of the SMSF or a related party if the acquisition is at market value. If the acquisition from a member of the SMSF or a related party is below market value, it will constitute a breach of the superannuation laws. The newly acquired commercial property can be leased back to the member of the SMSF at market rent. This can be particularly appealing to small business owners.
Limited Recourse Borrowing Arrangement (LRBA)
What if your fund is not enough to purchase an investment property outright? You can use your SMSF to take out a loan with a third party to purchase property but it must comply with strict conditions. If the SMSF defaults on the loan, no other assets within the SMSF will be subject to the creditor’s claims as the property acquired under the LRBA is required to be held in a separate trust (normally a bare trust).
Vacant land
The trustee of the SMSF can use the funds within the SMSF for repairs and maintenance of the property but not improvement of the property. Therefore, extra care is needed if you intend to purchase vacant land and build a new property on it.
Benefits of using a SMSF to purchase real property
Tax benefits
- There are potentially several tax incentives or concessions available including on income and CGT.
Asset protection
- Assets owned by SMSFs are generally protected from creditors in bankruptcy situations.
Disadvantages of using a SMSF to purchase a property
Limited liquidity
- Property is often hard to liquidate during an emergency. This means that your SMSF must maintain sufficient liquidity to cover expenses such as loan repayments and property related costs.
Higher costs
- Using a SMSF to invest in property is often associated with higher fees and charges, which can reduce your super balance.
Compliance issues
- There are strict guidelines to be followed and complied with in managing a SMSF. The trustee will need to bear the liability for non-compliance with the rules and regulations.
Using a SMSF to invest in property can be a strategic way to take advantage of tax benefits and potentially grow your retirement savings, but it requires careful consideration of the associated risks and compliance obligations.
The material in this article is for general information purposes only and does not constitute legal or professional advice by Lynch Meyer Lawyers.
