Entering the world of Self Managed Super Funds can be a complicated experience. Filled with untold legal jargon, complex structures, and contrasting investment advice, those researching the topic are often left with more questions than answers.
Thankfully, the team at Sentrika are SMSF experts, and are keen to shed some light on the common queries people have. A question we typically receive, though seemingly simple, drives to the heart of these funds: “Can I buy property directly using my SMSF?”.
The short answer is YES, it certainly is possible to purchase property through an SMSF. In fact, it’s traditionally seen as one of the most prudent investments you can make through such a fund.
Of course, that’s not the only thing you can purchase using your SMSF. From cars, to boats, to artwork and collectables, there’s a plethora of physical items you can invest in. These, however, come with quite sizable caveats, so be sure to consult with a qualified financial professional before planning any lavish purchases.
This is where things start getting a little more complicated. Although you can indeed purchase property using an SMSF, you’re barred from living in it until you retire. Even then, doing so requires you to perform either an ‘in-specie’ transfer of the property from the fund to yourself, or for you to purchase the property from your SMSF.
Yes you can (but not to yourself or any other trustee of the fund). This may seem a little counterintuitive given the above point, but examining the Australian Taxation Office’s "Sole Purpose Test" helps to clarify things .
The sole purpose test is what all Self Managed Super Funds must meet in order to be eligible for the tax concessions normally available to super funds. To pass, “... your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement”.
Put simply, renting property owned by your SMSF to yourself would serve multiple purposes, and therefore the fund would not pass the test.
This is one of the few scenarios where it’s possible to be your own landlord through a SMSF. Commercial premises can be leased back to a fund member for their business, but as always, there are restrictions.
The property in question must be leased at a reasonable market rate, follow an abundance of specific rules, and fit into your overarching investment strategy. Admittedly, that last one is controlled by yourself and the other fund members, but altering it to incorporate your dream office can be an involved process in itself.
Whether residential or commercial, property doesn’t come cheap. Unless you plan on buying an address outright, you’ll need to finance the property the same way you would in any other instance, by borrowing.
This can be achieved in an SMSF through a limited recourse borrowing arrangement. This involves establishing a separate trust outside the SMSF structure, in which to hold the property while it is being repaid. Should the buyer fail to meet the loan instalments, the lender can access only what is held in this trust - the property. Their recourse is limited to only this asset, not the others held by the super fund, hence the name.
Though a good overview of property ownership through SMSFs, this article merely scratches the surface of what you need to know before establishing your own fund.
There are a wealth of other factors to take into consideration to ensure you enjoy a prosperous career and retirement. Review our blog to find out more information, or reach out to our friendly team to arrange a no-obligation discussion. We specialise in providing self managed super fund, accounting, and business advisory services that deliver optimal outcomes for clients.
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