Self Managed Super Fund Property Investment Rules Explainedamir@propertytaxspecialists.com.au
Self Managed Super Funds (SMSF) are one way Australians can take control of their retirement savings because they can manage their investment assets themselves. So, SMSFs have become a popular way for Australian investors to buy and hold an investment property.
At the end of June 2021, the Australian Taxation Office reported that SMSFs account for $822 billion in assets – about 25% of the overall superannuation asset investment amount.
Using your self-managed super fund for property investment is a great way to diversify your portfolio and increase retirement savings. However, it’s important to understand the strict compliance rules before you dive in.
So, in this blog post, we will provide a general overview of what SMSFs are and how they work with regard to property investment.
Factors You Should Consider Before Buying an Investment Property with Your SMSF
Self-managed super funds are a particularly attractive option for Australian investors because it’s a private fund that members manage themselves rather than having the superannuation fund providers manage on their behalf.
This means that as a fund member, you can have full control over your retirement savings, what investments you put your money into and how much risk you’re prepared to take on. And beyond the flexibility to manage the fund as you see fit, there are also several benefits of using it as an investment vehicle.
For example, the tax benefits include only paying 15% on SMSF income. So if you fall into a higher tax bracket, an SMSF could be a way to grow your retirement savings in a tax effective manner.
However, although investing with an SMSF has many benefits, it’s worth considering that it also comes with strict compliance regulations.
One of the most important compliance regulations is that all investment decisions must satisfy the sole purpose test. The sole purpose test entails making investment decisions solely for the purpose of providing retirement benefits for the fund members.
Beyond solely providing retirement benefits, SMSFs also have to meet a variety of administrative obligations, including:
- executing a compliant trust deed (a legal document that includes how to set up and operate your SMSF),
- signing the trustee declaration (a statement that trustees understand their duties and responsibilities),
- lodging an election with the ATO,
- registering the SMSF with the Australian Business Register
- establishing an investment strategy,
- considering appropriate insurance cover for each SMSF member to protect them against investment risk,
- preparing annual financial reports and member benefit statements
- lodging income tax returns and meeting tax obligations including capital gains tax liability, and
- appointing an independent auditor to undertake an annual audit.
So, although there are several benefits to investing with an SMSF, managing the fund is no small feat – you have to have the relevant financial knowledge and expertise and have the time to meet all these obligations.
What Are Some Self Managed Super Fund Property Investment Rules for Residential Property?
In addition to satisfying the sole purpose test, there are some restrictions on who you can buy the residential investment property from and how it is used, including:
- you can’t purchase an investment property from any fund members or member relatives,
- fund members (or related parties) can’t use the property as a main residence, and
- fund members (or related parties) can’t rent the property out themselves.
Orlando and his partner Melanie have set up an SMSF, and as part of their investment strategy, they want to purchase a residential property. Orlando’s uncle currently has a property on the market in a promising area with a great rental yield.
So, they decided to chat to their financial advisor about applying for a home loan and putting in an offer.
However, after consulting their financial advisor and SMSF administrator, they were informed that they would breach the ATO’s compliance rules if they were to purchase the property from Orlando’s uncle.
The same would apply purchased the property from either one of the following parties:
- Another SMSF member
- Relatives of each member including a spouse, parent, grandparent, brother, sister, aunt, nephew, niece, lineal descendant or adopted child
So, Orlando and Melanie continued to search for a viable investment property that did not violate any of the SMSF property investment rules.
Beyond these specific rules, all investments by your SMSF must be made on a commercial ‘arm’s length’ basis, and the purchase and sale price of fund assets should always reﬂect true market value.
SMSF Investment Properties: Commercial Property Rules
The self-managed super fund property investment rules are slightly more flexible if you’re thinking about possibly investing in the commercial space.
You’re allowed to use the SMSF to invest in your own business premises, as long as the commercial property is primarily used to carry out your business activities. You can then rent the premises from your SMSF. In other words, the commercial rent you pay for the business premises will go directly into your SMSF.
However, the rent you pay should always reﬂect the true market value of rent for similar properties.
SMSF Investment Rules: Borrowing Money
As part of the investment strategy, your SMSF can borrow money to purchase an investment property. However, there are also strict rules that govern these loans.
If you need to borrow money to buy property, you need to do so via a limited recourse borrowing arrangement (LRBA). According to this arrangement, the SMSF trustees need to set up a separate trust that will hold the property on behalf of the SMSF. So, the property is held outside of the SMSF structure, but the income and expenses will still go through the fund’s bank account.
The reason behind holding the property in a separate trust is to protect the other assets in the SMSF. Thus, should the SMSF default on the loan repayments, the bank or lender will not have recourse to any other asset held by the fund – they are only authorised to take back that specific investment property.
Although the self-managed super fund property investment rules are quite complex, they can be broken down into three main points:
- Don’t buy property from fund members and related parties
- Your investment decisions must satisfy the sole purpose test
- You comply with all of the relevant laws and regulations surrounding SMSF investing in
So, while SMSFs are a great way for investors to purchase property, there is a lot to consider before you jump in.
If you are considering SMSF property investments, it’s important that you seek professional advice to ensure your investments comply with the law and maximise their growth potential.
At Property Tax Specialists, our experienced advisors can provide you with expert SMSF advice, including structuring ownership of property portfolios to meet your goals. Get in touch today if you want more information about how we can help ensure all your property investments are legally compliant and set up for maximum growth.
DISCLAIMER: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.
Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002