Self-managed super funds (SMSF) are part of the investment landscape in Australia.
Statistics indicate that there are nearly 600,000 SMSFs in Australia with a total of around 1.1 million members. They account for approximately 25% of the $2.7 trillion dollars invested in superannuation in Australia.
Purchasing property through a SMSF has become very popular but it is important to get the right financial and legal advice.
You can invest in both commercial and residential property, but there are strict rules in place.
It would be fair to say there are certain advantages in investing in commercial property over residential property.
First and foremost is that when it comes to residential property it can’t be rented or occupied by yourself or any other trustee of the SMSF.
What is the purpose of self-managed super funds?
Many people forget that the SMSF is there to provide retirement benefits for the members which is referred to as the ‘sole purpose test’.
The Australian Taxation Office (ATO) states:
Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.
Contravening the sole purpose test is very serious. In addition to the fund losing its concessional tax treatment, trustees could face civil and criminal penalties.
It’s likely your fund will not meet the sole purpose test if you or anyone else, directly or indirectly, obtains a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund).
When investing in collectables such as art or wine, you need to make sure that SMSF members don’t have use of, or access to, the assets of the SMSF.
Your fund fails the sole purpose test if it provides a pre-retirement benefit to someone – for example, personal use of a fund asset.
Full details can be found in the SMSFR ruling 2008/2 on the ATO website.
Commercial Property
Many businesses through their owners purchase a commercial property to operate the business from.
Whilst this is a legitimate option you must remember that the rent received must be at a commercial market rate and the lease must reflect acceptable and normal commercial terms.
Therefore, you must make sure the purpose is not to provide premises at a cheap rate etc, but to comply with the sole purpose test.
It is also important that when considering buying commercial property in your SMSF you consider the rate of return and growth of the property.
Residential Property
The most important matter to note is that you cannot purchase a property to live in or rent for yourself or another trustee.
Also, you cannot have related parties living in the property or renting it.
So, forget the holiday house or purchasing a property for your children etc.
A SMSF can purchase land for development but there are strict rules around it. For example, you can’t be carrying on a business.
Loans and Borrowing
Your SMSF can apply for a SMSF loan to purchase property but there are strict compliance requirements.
You cannot purchase multiple titles for the asset.
It is very important to understand that any borrowing in the SMSF to purchase property can only be undertaken by a ‘limited recourse arrangement’.
This basically means the lender can only seek recourse against the property in question.
Taxation issues
Net income generated by an SMSF will generally be taxed at a concessional 15% tax rate, subject to meeting all compliance requirements.
Capital gains on assets held for more than 12 months will receive a third discount with an effective tax rate of 10%.
How can FC Lawyers help with self-managed super funds and purchasing property?
Our expert team has acted for and advised clients for over 25 years in relation to SMSF requirements and the legal obligations when purchasing property.
We also work with accountants and financial advisors to ensure their clients are covered legally.
Contact our team to discuss your self-managed super funds questions.
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