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self-managed super funds (SMSFs) and property
It’s no surprise that Australians’ love of property extends to SMSFs. Their solid record of long-term growth and tangibility has made them popular.
There are many issues, both legal and practical, you need to consider before setting up an SMSF to buy a property.
how you do it
Purchasing a property in your SMSF must be in line with your fund’s governing rules, investment strategy and super legislation. For instance, super law prohibits an SMSF from acquiring a residential property from a member or related party of the fund. Another is where your fund holds a residential property, none of the members or related parties can use it.
If you don’t have enough money in your SMSF to buy the property outright, there are a number of ways and structures to buy it.
One way is to use a limited recourse borrowing arrangement (LRBA). Your SMSF borrows to buy the property that will be held in a separate trust with a different trustee – the most common is a ‘bare trust’ – until the loan is repaid. There are strict rules around LRBAs so it’s important to seek advice first.
- If the property is sold after you’ve started a pension, currently there will generally be no capital gains tax on the sale – this may change following the government’s proposed changes to superannuation.
- Can be an effective way for small business operators to own their business premises.
- Can be a way of protecting the asset from creditors.
- You cannot transfer your own home, investment property or the holiday house into your SMSF, nor can you or a related party ever live in it while it’s in the fund.
- The property must be managed on an ‘arm’s length’ basis. If you’re renting your business premises from your SMSF it means paying a market rate of rent.
- Super pensions require minimum annual payments which are age-based. If rental income falls short of this amount, you’ll need to find some cash or sell the property.
- When a member dies, the property may need to be sold to pay beneficiaries. This may trigger capital gains tax and stamp duty if it’s transferred to them.
There can be limitations when using a LRBA. For example:
- It can be difficult to purchase a property which covers more than one title (eg farms and some factories).
- It is not possible to alter or improve your property beyond its original state. Repairs and maintenance are allowed. Negatively gearing through an SMSF means you are only gaining a tax break of 15 per cent.
- Contribution caps limit how much you can contribute, making it difficult to negative gear.
- You will need to have enough cash in your fund to cover loan repayments.
The Australian Taxation Office has a few tips for new players:
- If using a LRBA, have the bare trust established before exchanging contracts.
- Understand you cannot borrow through a related trust.
- You cannot purchase the property from a member or related party of the fund unless it’s a business premises.
- Property should be part of a balanced approach to investing. If it dominates your SMSF, you may have liquidity problems when it comes time to pay retirement or distribute your estate and you may find yourself needing to sell the property at an inconvenient time.