Mixing property and your self-managed super
You may want to set up an SMSF primarily to invest in residential property. Here we explain when you can use your SMSF to invest in property and what you need to consider before you do.
- Self-managed super fund property rules
- What it will cost you
- SMSF borrowing
- Property developers and SMSFs
Self-managed super fund property rules
You can only buy property through your SMSF if you comply with the rules.
The property:
- Must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- Must not be acquired from a related party of a member
- Must not be lived in by a fund member or any fund members’ related parties
- Must not be rented by a fund member or any fund members’ related parties.
However, your SMSF could potentially purchase your business premises, allowing you to pay rent directly to your SMSF at the market rate.
See the Australian Taxation Office’s webpage on self‑managed super funds for more information.
Experienced property investors John and Barbara are in their early 50s and want to set up an SMSF to use their super to purchase another investment property. They have a property portfolio worth $1 million (with investment loans of $800,000), a combined $200,000 in super and no other investments.What it will cost you
SMSF property sales may have many fees and charges. These fees can add up and will reduce your super balance.
You should find out all the costs before signing up including:
- Upfront fees
- Legal fees
- Advice fees
- Stamp duty
- Ongoing property management fees
- Bank fees
Be wary of fees charged by groups of advisers who recommended each other’s services as it is important to get independent advice. Anyone who gives advice on an SMSF must have an Australian financial services (AFS) licence. ASIC Connect’s Professional Registers will tell you if the company or person holds an AFS licence.
See investing in property for more information.
SMSF borrowing
Borrowing or gearing your super into property must be done under very strict borrowing conditions called a ‘limited recourse borrowing arrangement’.
A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property. Before committing to a geared property investment you should assess whether the investment is consistent with the investment strategy and risk profile of the fund.
Geared SMSF property risks include:
- Higher costs – SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
- Cash flow – Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
- Hard to cancel – If your SMSF property loan documentation and contract is not set up correctly unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
- Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
- No alterations to the property – Until the SMSF property loan is paid off alterations to a property cannot be made if they change the character of the property.
See borrowing to invest for more information on the risks of gearing.
Property developers and SMSFs
Property developers must have an Australian Financial Services (AFS) licence to provide financial planning advice. This includes advice on setting up an SMSF.
Property developers may have a pre-existing business relationship with the professionals they recommended. They may receive a referral fee or other benefits that could amount to thousands of dollars.
Don’t be pressured into making property purchase decisions for an SMSF. Watch out for sales tactics like competitions, free flights to sales meetings or being taken out for free meals. Make sure you get financial advice from someone who has an AFS licence. See questions to ask a financial adviser for talking points you can use to check for sales incentives.
Think twice about investing in property markets you are not familiar with, do your own research first.