Australians love to invest in property. And what’s not to love? It’s tangible, offers diversification and tax benefits, and can provide you with a good income and strong capital growth.
When held in a Super account, investing in property can be of benefit, particularly with amendments to borrowing in SMSFs in recent years. Property investment access through Super has widened significantly as a result, though this strategy is not for everyone.
SMSF is a highly regulated affair so investing a property is not a direct proposition. Therefore, it is essential to understand the rules so that you can ensure you won’t be caught out in a compromising and costly position and that your fund will remain compliant.
What type of property can be purchased within a SMSF?
There are all kinds of properties within your SMSF that you can purchase. These include commercial, industrial and residential however, each type of property has different regulatory requirements.
Any residential property that you would like to purchase through your SMSF must:
- meet the ‘sole purpose test’ – this essentially means the fund must be run for the sole purpose of providing retirement benefits to its members;
- not be attained from a related party to the member such as a spouse, family member or business partner;
- not be rented or lived in by a member or party related to the member.
Commercial or Industrial Property (Business Real Property)
Similar to the residential property, investing in a commercial or industrial property must meet the sole purpose test. Except for the fact that you are able purchase or rent the commercial or industrial property (business real property) from your SMSF – providing it is at the market rate.
When can a SMSF borrow?
In the event that your capital within your SMSF in insufficient and you are unable to purchase the property outright, a limited recourse arrangement may be made using your Fund by borrowing the amount.
Be aware that borrowing arrangements through super can be very restrictive. There are rules around acquiring property using borrowings. For example, even though a SMSF is able to purchase a vacant block of land, it is unable to purchase a block of land using borrowings that has a view of constructing a house. This would breach the ‘single acquirable asset rule’.
Under this rule, normally unless two payments are involved, the single acquirable asset rule would not be treated in a house and land package. E.g. a 30% deposit and a 70% payment of the balance when the house is complete.
When it comes to investing in a property using your SMSF, you should be cautious. Beware of property ‘specialists’ who have vastest investments in selling such kinds of investments to SMSF members. These ‘specialists’ are most likely receiving some type of commission and could potentially push property purchase through super without having a correct understanding of the member’s situation.
Note: Using super to purchase a property may not be advisable for everyone. Before signing any type of contract always seek advice from an authorised SMSF specialist.
If you require help with understanding what’s best for you, the team at Superannuation Advice Australia can help. Contact us today!