If you have a Self Managed Superannuation Fund (SMSF), you have the ability to purchase property provided you abide by the Self Managed Super Fund Property Rules.
A SMSF can purchase and hold any type of property. However, there are a few rules.
There are many benefits in using your super to purchase property, but getting it wrong could be expensive or land you in strife… so read on!
Basic Self Managed Super Fund Property Rules
- A SMSF cannot acquire a property from a related party, unless it is ‘Business Real Property’
- Real Property owned by a super fund cannot lease or rent the property to a related party, unless it is Business Real Property
- All transactions, including lease agreements, purchase costs and sale costs must be conducted on an arm’s length basis – especially where the transaction occurs between related parties.
- The Fund’s Trust Deed and Investment Strategy must permit the investment
There are many specific rules associated with Self Managed Superannuation Fund property investments, such as the definition of important terms like ‘business real property’, ‘related party’ and ‘arm’s length‘.
It is imperative that you understand these terms to assist in getting a true understanding of the Self Managed Super Fund Property rules.
Benefits of Property in a Super Fund
There are a number of benefits associated with owning a property within a self managed super fund. These include:
- Provides diversification in a super fund portfolio
- May provide a combination of income (rent) and capital growth (increase in value), which in turn can increase your retirement savings
- As a business owner, you could purchase the premises your business operates from using your superannuation savings and lease the property to your business. This way, the rent your business pays is actually increasing your retirement benefits.
Risks of Property in a Super Fund
All types of investments have risk. All Types. Many people say things like cash and term deposits don’t have risk. Well, they do. They have interest rate risk – the way cash based returns are impacted by movements in interest rates and they have inflation risk – where inflation erodes the purchasing power of cash, as cash does not include a capital growth component. I.e. it does not increase in value, it merely produces income.
Anyway, back to the risks of Property in a Super Fund:
- Generally requires a large sum of money to purchase real property, which may limit the SMSF’s ability to adequately diversify its portfolio
- Can cause liquidity issues, as a large portion of the Fund’s assets may be ‘tied up’ in a property, which is an illiquid asset and part of the property can generally not be sold off to free up cash – most likely the whole property will need to be sold
- There are costs associated with maintaining a property (rates, maintenance, property management, legal costs, etc.)
- If a SMSF member passes away, their member balance may need to be paid out to beneficiaries as a lump sum. If some or all of the member’s balance consists of a real property, the property would need to be sold (at what may be unfavourable market conditions) to make the death benefit payment. This can be even more inconvenient if a related party is running their business from the property.
- You need to constantly keep abreast of the Self Managed Super Fund Property rules (or, better yet, have a qualified and educated adviser!)
Borrowing to Purchase a Property in a SMSF
SMSF’s have the ability to purchase a property using borrowings. Again, there are many rules required to be adhered to in order to make this happen.
Here is a very basic run down of the steps that must be followed for Self Managed Super Fund property rules in relation to borrowings:
- A ‘Bare Trust’ is established
- The Bare Trust is the legal owner of the property and associated asset. The SMSF is the beneficial owner
- All rent/lease payments are made by the tenant to the SMSF’s bank account
- All borrowing costs and repayments are made from the SMSF bank account
- The loan is a Limited Recourse Borrowing Arrangement (LRBA), where the recourse by the lender on the loan is limited to the property purchased
- The Trust Deed of the Fund must allow a LRBA
- The Investment Strategy of the Fund must allow a LRBA and an appropriate allocation to Property
- All loan arrangements must be conducted on an arm’s length basis
- A new Bare Trust must be established for each LRBA
If you would like anything clarified or have any further questions about Self Managed Super Fund Property Rules or any other topics, please do not hesitate to leave a comment.
Professional advice in this area is highly recommended, in fact, essential. Speak to an SMSF Specialist, a financial planner or your accountant for more information.