Self-managed Superannuation Funds (SMSFs) can allow you greater choice regarding investment options when compared with public-offer superannuation funds whilst still offering the same tax advantages. Investment in Real Estate is one type of of investment class that can be common for many SMSF trustees.
How is Property classified in Superannuation?
Property falls into two types within the superannuation environment; Residential Property and Commercial Property.
For some investors, a residential property is a tangible investment that provides opportunities for capital growth and regular income streams. What must be considered though, is how the property is used in the SMSF environment, paying close attention to the sole purpose test. For instance, if you are a member or related party of the member or trustee of the SMSF, you cannot live in the property.
Furthermore, according to the Superannuation Industry (Supervision) Act of 1993 a residential property cannot be acquired by an SMSF from a related party. Following this same principle, a residential investment property which the member owns themselves cannot be ‘contributed’ into the fund by way of a contribution.
It is an option business owners to invest in commercial property they use to operate their business from. The involvement of an SMSF as the owner/part owner of this type of property is a tax effective way for business owners to save for their retirement whilst also providing an opportunity to have control over their business premises.
Acquiring a commercial property within an SMSF is slightly more flexible than that of residential property as it is possible for a commercial property to be acquired from a related party. Important rules apply to such a transaction including:
- the property must be used wholly and exclusively in one or more businesses at the time of the transfer; and
- the transfer must occur at market value (supported by an independent valuation).
How can I structure my SMSF so I can purchase a property?
There are a number of different ways a SMSF can choose to acquire a property. Common ways include:
- using the SMSF’s existing cash reserves; or
- using a combination of the SMSF’s cash reserves and borrowings from a compliant limited recourse borrowing arrangement.
Indirectly via an approved Fixed Unit Trust or Company
- Combining SMSF cash reserves with funds from a related party to acquire jointly via a compliant structure
Each of these methods has its advantages and disadvantages. If you would like further information on structuring your SMSF’s property purchase please contact our office. Having the appropriate structure in place before a property is purchased is key to achieving the most favourable outcome.
Can I transfer property out of an SMSF to myself?
There is an ability for members of an SMSF to transfer a property out of the SMSF environment into their own names without converting the property to cash, but there are rules that apply.
The property would need to be transferred at market value and the member(s) would need to meet a condition of release (e.g. retirement). There are many other considerations such as capital gains tax and stamp duty, which may be able to be reduced with appropriate forward planning.
If you are considering transferring a property out of your SMSF, please contact our office to discuss how we can assist you to navigate in a compliant and cost effective manner.
Do you have more SMSF property questions?
Our team is here to support you with all areas of SMSF, including the complexities associated with superannuation and property. If you have any questions regarding purchasing a property with your SMSF, or any general SMSF inquiries, please contact our Manager of Self Managed Superannuation Funds Simon Abbott on 03 5244 6867.
Disclaimer: The information provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives or goals.