You may want to set up an SMSF primarily to invest in residential property. Here we explain when you can use your SMSF to invest in property and what you need to consider before you do.
SMSF property rules
You can only buy property through your SMSF if you comply with the rules.
- Must meet the 'sole purpose test' of solely providing retirement benefits to fund members
- Must not be acquired from a related party of a member
- Must not be lived in by a fund member or any fund members' related parties
- Must not be rented by a fund member or any fund members' related parties
However, your SMSF could potentially purchase your business premises, allowing you to pay rent directly to your SMSF at the market rate.
See the Australian Taxation Office's webpage on self‑managed super funds for more information.
What it will cost you
SMSF property sales may have many fees and charges. These fees can add up and will reduce your super balance.
You should find out all the costs before signing up including:
- Upfront fees
- Legal fees
- Advice fees
- Stamp duty
- Ongoing property management fees
- Bank fees
Be wary of fees charged by groups of advisers who recommend each others' services as it is important to get impartial advice. Anyone who gives advice on an SMSF must have an Australian Financial Services Licence (AFSL). ASIC Connect's Professional Registers will tell you if the company or person holds an AFSL.
See investing in property for more information.
Borrowing or gearing your super into property must be done under very strict borrowing conditions called a 'limited recourse borrowing arrangement'.
A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property. Before committing to a geared property investment you should assess whether the investment is consistent with the investment strategy and risk profile of the fund.
Geared SMSF property risks include:
- Higher costs - SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
- Cash flow - Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
- Hard to cancel - If your SMSF property loan documentation and contract is not set up correctly,unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
- Possible tax losses - Any tax losses from the property cannot be offset against your taxable income outside the fund.
- Cannot borrow to improve the property - Borrowed funds can be used to maintain a property but cannot be used to improve a property.
Be cautious if someone related to the property you are planning to purchase, offers to arrange your loan. Sometimes unscrupulous advisers work in groups and recommend each others' services.
Also see borrowing to invest for more information on the risks of gearing
For more information refer to - https://www.moneysmart.gov.au/superannuation-and-retirement/self-managed-super-fund-smsf/smsfs-and-property