What types of property can I buy through my super?
You can use your SMSF to buy residential or commercial property. However, any property held by your SMSF must meet the sole purpose test of providing retirement benefits to fund members, or a benefit to their dependents if a member dies before retirement.
- Residential property: there is nothing to prevent an SMSF from investing in residential property as long as the property is not acquired from a related party of a member.However, the family home cannot be owned by your super fund. Nor can you rent a residential property owned by your SMSF to a fund member, or to their related parties.However, you can buy an investment property of your choice that you rent out to tenants who are not fund members or their relatives.
- Commercial property: you can also hold commercial property, including your own business premises, in your SMSF.While the property still needs to meet the sole purpose test, when dealing with commercial property, an SMSF can generally purchase the property and lease it back to a member or a related party of the fund – including the member’s business.An arm’s length sale price and lease arrangement will be particularly important when acquiring and / or leasing property to a member or related party of the fund.
Can my SMSF buy a residential investment property?
You can use your SMSF to buy a residential investment property. However, your fund’s decision to buy the property must be consistent with the sole purpose test. That is, it must be consistent with the sole purpose of providing retirement benefits to its members, or a benefit to their dependents if a member dies before retirement. The investment return from the property through both rental income and capital growth must be the sole focus for making the investment and you must have no other purpose or motive in mind, such as living in the premises yourself.
Also, there are strict restrictions on who your SMSF can buy the property from and who it can be rented to. The property cannot be acquired from, or rented out to, a related party of the fund (a related party of the fund includes the members of the fund and their associates and any standard employer-sponsors of the fund and their associates.)
Before buying property within your SMSF, it’s important to understand superannuation law and other relevant law in this area. Importantly, your SMSF’s trust deed must enable the property to be purchased and it must be consistent with your fund’s investment strategy. It is also important to ensure your fund has a diversified investment portfolio, adequate liquidity and a divestment strategy.
I already own a residential investment property, can I transfer this into my SMSF?
Transferring a residential property into your SMSF that you, or a related party of your SMSF, already own is prohibited under superannuation law. However, an exception applies if the property is classified as business real property.
Can my SMSF buy my family home?
As a general rule, your SMSF is not permitted to buy any assets which are owned by you or any other related party of your fund. Although there are some limited exceptions that apply to listed securities, business real property and in-house assets, your SMSF is unable to buy your family home.
However, it is possible for your SMSF to buy a residential property from someone who is not a related party of your fund. It is also possible for that property to be rented out to someone who is not a related party of your fund.
Can I renovate the property?
Yes. It is possible to conduct maintenance and repairs, as well as improvements to a property bought under a limited recourse borrowing arrangement via your SMSF. The main difference lies in how the building works can be funded.
Maintenance and Repair
These are defined by the ATO as follows:
“Maintenance: work done to prevent defects, damage or deterioration of an asset or in anticipation of future defects, damage or deterioration, provided that the work merely ensures the continued functioning of the asset in its present state.
Repair: remedying or making good defects in, damage to, or deterioration of an asset and contemplates the continued existence of the asset.”
This can be summed up as general wear and tear on the building. An SMSF may either use its own funds or it can borrow additional funds to undertake this type of building work. This also includes both initial and ongoing repairs.
These are defined by the ATO as building works where the state or function of the asset is significantly altered for the better, through substantial alterations, or the addition of further substantial features to the asset.
They may include renovating a kitchen, adding an extension or a pool. In this instance, the SMSF can only use existing funds to finance the improvements. These existing funds can be accumulated in the fund by building up cash from contributions or rent received. An SMSF cannot borrow to undertake improvements.
Finally, for properties that have been purchased using borrowings in an SMSF, the ATO will not allow improvements that result in a change to the underlying nature of the property while the loan is still outstanding. For example, you cannot establish a borrowing arrangement to purchase a single dwelling and subsequently use SMSF cash to convert it into a block of investment units – at least not until the loan has been completely repaid and the borrowing arrangement has ended.
Can I buy a property for my son or daughter to live in if they are not a member of the fund?
Your fund must be maintained for the sole purpose of providing retirement or death benefits for, or in relation to, the members of your fund. The investment return from the property through both rental income and capital growth must be the sole focus for making the investment and you must have no other purpose in mind such as allowing your son or daughter to live in the premises.
Even if your child pays a market rate of rent to live in the property, the superannuation rules do not permit a fund asset to be leased to a related party of the fund if the market value of that asset exceeds five per cent of the fund value.
Can my SMSF buy my business premises?
Yes, your SMSF can buy your business premises, provided the premises meets the business real property definition, and the property is acquired at market value. The property must be wholly and exclusively used in a business.
It’s important to remember that such a purchase must also meet the fund’s sole purpose of providing retirement benefits to its members, or a benefit to their dependents if a member dies before retirement. As such, the investment return from the property through both rental income and capital growth must be the focus for making the investment.
Where a fund buys an existing business property from you, or a related party of the fund (which includes most relatives and associated businesses), the purchase price must be at market value. In addition, if there is a tenancy agreement between the fund and the business, this should also be based on current market practice and prices.
You can also buy business property that is used in a business that you are not associated with. As an alternative to your fund buying your business premises, you may also be able to transfer it into your fund as an in specie contribution.
Can I buy a holiday house with my super fund?
For superannuation purposes, you cannot generally live, or even reside temporarily, in any residential property owned by the SMSF, including a beach house.
Remember your fund must always comply with the sole purpose test. That means the investment return from the property through both rental income and capital growth must be the sole focus for buying the property and you must have no other purpose or motive in mind.
Your SMSF can buy a beach house that you rent out to tenants who are not members of the fund, their relatives or other related parties of your fund.
Can my SMSF buy a rural property?
An SMSF may generally invest in rural property, providing it meets with the fund’s investment strategy, and considerations such as liquidity, diversification and cash flow are all fulfilled, along with the sole purpose test for the provision of retirement benefits for its members, or benefits to their dependents if a member dies before retirement.
Furthermore, real property that is being used in a primary production business will satisfy the definition of business real property even if not all the property is being used for commercial purposes. This means it would be possible for an SMSF to acquire such a property from a related party at market value, even if a member, or another related party of the fund, lives on the property. It also means once the property has been acquired by the SMSF it can be leased to a related party of the fund at market rates without breaching the rules.
This concession applies as long as the area of the property which is being used for domestic or private purposes does not exceed two hectares and the domestic or private use is the not the predominant use of the property.
Can I live in the property that I’ve bought through my SMSF?
No. You may not use a property held by your SMSF for private purposes. This means that you cannot use it as a home.
However, if the property meets the definition of business real property, you can lease the property to your business as long as it is done on a commercial arm’s length basis. An example of this might be where your SMSF owns an office suite, or a warehouse.
Can I pool my SMSF with a friend/family member to buy an investment property?
It is possible for your SMSF to co-own an asset with another entity, including friends and related parties.
However, you need to be aware of the rules which prevent your SMSF from acquiring all or part of a property that is owned by a related party of your fund and the rules which prevent a property which is owned, either in part or full, by your SMSF from being rented out to anyone who is a related party of your fund. The above rules do not apply if the property being acquired from a related party, or leased to a related party, is business real property and is done so at market value (generally a property is considered to be business real property if it is used wholly and exclusively in one or more businesses).
There are also rules which prevent an asset, which is owned either in part of full by your SMSF, from being used as security.
There are different ways to co-own an asset with an SMSF. For example, a tenants-in-common agreement could be used or alternatively co-ownership may be via a unit trust or company structure. Each approach has its own advantages and disadvantages. Co-ownership arrangements involving an SMSF can be complex so you should consider seeking professional advice from a qualified financial adviser.
Can I borrow to invest in property in my SMSF?
Yes. However, there are strict rules governing how the loan and subsequent property purchase is structured when using borrowed money inside an SMSF.
Borrowing through an SMSF for property investment purposes must be done under what is referred to as a limited recourse borrowing arrangement. These arrangements can be quite complicated and may require professional advice. For example, under these arrangements, the property must be kept separate from the fund’s other assets. This ensures that if the fund defaults on making loan repayments, the bank and any interested parties will only have recourse over the property, but not to other fund assets. In order to achieve this, the borrowing rules require you to establish a security trust which will recognise the beneficial interest of the SMSF in that property and the rights of the lender. The trustee of this security trust holds the property in trust with the SMSF as the beneficial owner.
Another important factor when borrowing to invest in property is that loan conditions in an SMSF are different to those for regular housing loans. The maximum loan amount relative to property value will generally be lower and a range of conditions and risks need to be considered.
So, if you are considering borrowing through your SMSF, you should seek professional advice from a specialist financial adviser.
It is true – your SMSF can borrow to buy a property! This is an exception to the general rule that SMSFs are normally not allowed to borrow. This has not always been the case. The ability of a SMSF to borrow started when the ‘instalment warrant’ provisions were introduced back in 2007.
While it is possible for your SMSF to borrow now, the ‘Limited Recourse Borrowing Arrangement’ must be carefully structured to comply with very specific requirements prescribed by the law. A bare trust must be established as the legal owner of the property until the fund has fully paid for the property while the fund must be the beneficial owner of the property that will take the legal title of the property once the final payment is made. Further, the loan drawn down by the fund must be a limited recourse loan that is secured solely against the property.
Failure to comply with all the essential elements of the prescribed borrowing arrangement will mean that the fund is not eligible to access this specific exception to the general prohibition rules on borrowing, which could cause the fund to commit a breach.
Further, professional advice is strongly recommended even before a contract is signed for your SMSF to buy a property under the Limited Recourse Borrowing Arrangement. Getting the contract wrong could cause the fund to lose its complying status and may give rise to additional stamp duty when the loan is paid out and the beneficial interest in the property is transferred back to the fund. It could be an expensive mistake indeed.
For completeness, it should also be noted that SMSFs are not allowed to leverage off any increase in equity on the property as a result of future capital gains. Therefore, your fund cannot use the increased equity on an existing property to buy further properties like you could outside of the superannuation fund environment.
How much can you borrow?
Banks will generally allow SMSFs to borrow around 70-80 per cent of the property value, however it is more desirable to have at least a 50 per cent deposit so the property is positively geared or close to it.
Tax-deductible personal super contributions, salary sacrifice contributions, and compulsory super guarantee payments made into your SMSF, as well as any rent your fund receives on the property, can all be used by your SMSF to help cover the loan repayments.
It’s also important to have a sound strategy in place to pay the property off over time.
What are the benefits of investing in property through my SMSF?
There could be several benefits of buying property through an SMSF and these include:
- Tax savings: if you buy and hold property within your SMSF until you retire and start taking a pension from your fund, it will generally be exempt from capital gains tax when the fund sells the property. Also, any income received by your fund (ie rent received) while you are drawing a pension will be completely tax free.Before you start to draw a pension from your SMSF, any rental income generated will be taxed at a maximum of 15%. And, if the fund sells the property after holding it for at least one year, your fund will also only pay capital gains tax on the sale of the property of up to 10%.Comparatively, if you were to buy the same property in your own name, rental income would be taxed at your personal tax rate (which could be as high as 46.5%). This would also apply to any capital gains tax payable on the sale of the property (albeit after receiving a 50% reduction if the property was held more than one year).
- You may not be able to afford to buy property in your own name: however you, and other members of the fund, might have a reasonable amount of combined super saved inside your fund. Buying property in your fund might be a good way to achieve your goal of owning an investment property or owning your own business premises.
- Benefits for business owners: if you own your business premises through your super fund, and you lease it to your business, you will need to pay rent to your superannuation fund which is generally tax deductible to your business. Given the relatively low concessional contribution limits that are currently available, paying rent to your super fund could be a great way to accelerate your retirement savings without going over the contribution limits.
- Asset protection: assets held in a superannuation fund (including property) are generally protected from creditors in the event of bankruptcy. However, before you decide to invest in property through your SMSF, there are several things you should consider. These include:
- Investment strategy: any investment made by your SMSF must align with its investment strategy.
- Diversification: property generally has a significant value and may reduce diversification in your portfolio, depending on the value of your fund’s other investments and what asset classes those investments are in.
- Liquidity: the nature of property could make it difficult to dispose of quickly. You should check whether your fund is sufficiently liquid and able to pay expenses and benefits as and when the need arises without having to sell the property at short notice.
Can I buy an overseas property with my super?
All investments of an SMSF must meet the requirements of the fund’s investment strategy including liquidity, diversification and cash flow, and the sole purpose test for the provision of retirement benefits for its members. While an SMSF is able to hold overseas property, consideration will need to be made of the laws in that country, particularly in respect of how or to what extent a foreign entity (an SMSF) can own land in that country.
The main issues surrounding investing in overseas property are generally around the practical aspects of satisfying the relevant laws of the country in which the asset exists, and how these relate to Australian superannuation law. Here are some of the major considerations:
- No Charge Over the Property
Generally it is not allowed for an SMSF asset to have a charge against it. Therefore with real property, the auditor of the SMSF would generally do a title search at the end of each year to confirm ownership and confirm no charges are held over the property. It can sometimes be difficult to obtain documents confirming no charge is in place over a property in countries where there is no Australian-style register of titles. If documents in relation to the property are not provided in English, they would have to be translated to prove ownership which may result in additional fees.
- Entity That Holds the Property
In several countries, a foreign entity such as an SMSF cannot hold property directly. A possible option may be to establish a local entity that purchases the property with the SMSF owning all the interests in the entity. This structure is quite complex and should be discussed with an adviser.
- Different Laws and Customs
The laws and customs of the country where the property is located also need to be carefully considered. Applicable tax and landlord/tenant laws can raise issues, for example, in some US states, authorities have the power to sell property where there are outstanding fees which would result in SIS compliance issues under the Superannuation Industry Supervision (SIS) Act.
- Payment of Taxes
The investment entity itself may need to be a taxpayer in the foreign country, which may require additional tax returns to be lodged and taxes are paid. This will mean that additional specialist assistance will be required by the SMSF, probably based in the country where the asset is located.
- Local Real Estate Agent
It is expected that the property would receive rent and the SMSF would pay for all expenses in relation to the property. However, doing this from Australia would be impractical, particularly if an overseas bank account is established. A locally based real estate agent could run an account for the SMSF with rent and expenses going via this account. In this scenario the trustees will need to ensure regular statements are received and that an agreement is in place covering how frequently net proceeds will be transferred into the SMSF.
- Foreign Currency
The trustees of the SMSF need to consider the risks associated with fluctuations in the value of foreign currency and exchange rates. All superannuation assets need to be converted into Australian dollars for financial statements, so movement in the exchange rate may result in variation. These variations could in turn have impacts on other superannuation calculations such as member balances and minimum pension levels. Additionally, care would need to be taken when considering the tax treatment on profits that may result from currency movement.
- Sovereign RiskThe question of sovereign risk is another consideration. Just as can happen in Australia, a foreign government can change the rules in relation to taxation or foreign investment. The implication of these changes may mean that the ownership of the foreign property is no longer tenable. In fact there is even the possibility of the foreign regime resuming ownership of their domestic assets from foreigners without compensation.You will also need to consider that residential property cannot be leased to a related party of the SMSF and it would not be possible for members or relatives of the fund to derive personal use of the property.Various aspects should be considered in relation to purchasing overseas property within superannuation and it would be best to discuss the options and considerations with a financial adviser.
How much money do I need to have in super to buy a property?
As a general guide you need a minimum of $150,000 in existing super savings for an SMSF to be a cost-effective option. That’s because on amounts under $150,000, the fees on a typical retail, industry or corporate super fund are generally cheaper.
It also ensures you will have enough money to allow some diversification in your investments. Putting all your super eggs into the one property basket, rather than spreading a portfolio across other types of investment, can be a risky strategy.
Remember, this recommended fund size is based on the entire fund balance, which includes the superannuation assets of all fund members (e.g. your spouse, children).
If you still don’t have enough money in your super, even by combining funds, there are strategies a financial planner can put in place to help you get to an appropriate amount to consider investing in property through your super.
How long does it take to set up an SMSF?
Setting up an SMSF generally takes at least six to eight weeks. The key steps involved are:
- setting up the fund and trust deed
- registering the fund with the Australian Taxation Office (ATO)
- setting up a fund bank account and arranging to rollover your super
- considering the insurance needs of fund members, and
- preparing your investment strategy so you can start investing
How long will it take before I can buy a property using my superannuation?
If you don’t currently have an SMSF set up, then it generally takes at least six to eight weeks to set up a SMSF and if you require an LRBA you’re looking at another four weeks or more. You should be prepared to wait at least ten to twelve weeks before you even start looking at properties to buy through your SMSF.
Can I use my SMSF to buy a property from a relative or member?
A SMSF is generally prohibited from buying assets from a member or a relative of a member, with the exception of listed Australian shares and ‘business real property’. For instance, a SMSF is prohibited from acquiring a residential property or holiday unit from a member of the fund or anyone associated with them.
However, if the property is ‘business real property’, which is essentially a property that is used wholly and exclusively in one or more business (regardless of who carries on the business), your SMSF may buy the property from you, provided that the fund pays market value for the property and the acquisition is consistent with the fund’s investment strategy.
As a preventative defence in case of an audit, documentary evidence such as a valuation of the property should be obtained and retained on file just in case the tax office challenges you on the sale value of the property in future.