One of the most common questions we get asked is whether a Self Managed Super Fund (SMSF) can purchase residential property. Often the answer to the question is dependant on your personal circumstances. The Australian Taxation Office (ATO) has recently released guidance material to assist in making this decision.
The ATO have confirmed that the legislation does not allow an SMSF to purchase the home a member, or for their families, live in. even after the member has retired.
Many SMSFs invest in property as part of the fund’s investment strategy (subject to the above restrictions). However, the ATO has found that trustees, in some cases, don’t fully consider the risks associated with holding a property investment in the SMSF and how it can impact on other aspects of the fund’s operation, such as payment of benefits to members.
The following are particular areas where funds can be affected by their investment in property. It’s good to be aware of possible traps before such a large investment is made.
- Trust Deed: As with any transactions undertaken by the SMSF, the Trustee should consider whether it is allowed under the Trust Deed before proceeding;
- Investment Strategy: Trustees should consider if the investment meets the diversification and liquidity requirements of the fund. For example, when members retire and start receiving pensions, there needs to be sufficient money in the fund to meet the annual minimum pension payment requirements;
- Borrowing: When an SMSF borrows money to invest in property, it needs to do so via a limited recourse borrowing arrangement, which need to be made on commercial terms to avoid adverse income tax consequences such as income being deemed non-arm’s length income. The trustees also need to ensure the SMSF has sufficient cash flow to meet loan repayments;
- Related Party Transactions: Where the property is leased to a related party, trustees need to ensure compliance with super laws such as in-house asset rules, sole purpose test and arm’s length requirements;
- Use of Property in Retirement: When an SMSF starts to pay a pension, all property investments must continue to be maintained in accordance with super laws (particularly the sole purpose test and in house asset rules). For example, members are not able to occupy or lease residential property without the asset first being sold or transferred to the members as a benefit payment;
- Insurance: Trustees need to consider insurance to cover unforseen events which can impact on the SMSF’s property investment;
- Offshore investments: The risks and issues that are associated with property investments may be heightened when these investments are offshore.
Ultimately, as to what trustees can invest in relation to real property, the most informative form of guidance lies in the rules of the superannuation laws. It is important to be mindful that the trustees of the fund are ultimately responsible for managing the fund. Trustees are encouraged to seek professional advice. Grange is able to provide expert knowledge to trustees of SMSFs. If you need assistance with anything mentioned above, please give us a call.