Simple Guide to SMSF Property Investment
Self-Managed Superannuation Fund (SMSF) property investment has gained significant popularity since the introduction of SMSFs in Australia in 1999. An SMSF is a private super fund that you manage yourself as opposed to putting your Superannuation into industry or retail super funds. SMSFs are set up as a way of saving for your retirement. The key difference between an SMSF and other retail funds is that the members of an SMSF are also usually the Trustees of the fund. This means that the members of the SMSF run if for their benefit and are responsible for ensuring the fund complies with the relevant Super and Taxation Laws.
By being in control of the fund you have greater choice over the investments and insurances of the fund, and may have the choice to look at self-managed super investment property. There is a lot that needs to be factored into a decision to manage your own Superannuation and you must ensure that you understand the risks and responsibilities involved in this undertaking.
This Blog is going to focus on SMSF property investment and is about the property side of the equation not the management of Superannuation. It is vitally important that you speak with a qualified and independent expert regarding Superannuation. The Australian Securities and Investment Commission website contains information about choosing a financial advisor.
Can you buy property with a self-managed super fund?
It is possible to purchase property with an SMSF providing that the purchase complies with a number of rules. To ensure that the property purchase is compliant the property must:
- Meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- Not be acquired from a related party of a member
- Not be lived in by a fund member or any fund members’ related parties
- Not be rented by a fund member or any fund members’ related parties
It is worth noting here that there are different rules regarding Commercial premises. If your SMSF purchases a commercial property, it may be leased to a business owned by a fund member. It must however follow specific rules and be leased at the appropriate market rate.
An important factor that we often see from people that are interested in self-managed super investment properties is that they are looking at new property purchases. It’s important to firstly point out that most House and Land Packages are done on split-contracts. That is, there is a contract for the land and a contract for the build. Under SMSF legislation a fund can borrow funds under a limited recourse borrowing arrangement (LRBA). Which involves the super fund trustee taking out a loan from a third party. The trustee is then able to use those funds to purchase a single asset (single asset being an important factor here) to be held in a separate trust.
Under LRBA there is a rule that states that Super Fund trustees ‘cannot borrow to improve an asset’ (for example, real property). This therefore means that you cannot borrow for a split contract house and land package. A builder/developer would need to provide the new home on a ‘single contract’ arrangement. So based on this ruling, a fund could purchase a split contract house and land package using its own funds, but it cannot borrow to purchase a split contract property. As borrowing to purchase a split contract would breach the ‘cannot borrow to improve an asset’ rule.
For reference a ‘single contract’ property is where there is one contract for the purchase of a property which includes the cost of the build and the land. For this to happen, a builder/developer would need to own or purchase the block of land, and then enter a contract for the SMSF to purchase the land with a completed dwelling on it. With the payment for the total (land plus build) not payable until settlement of the final completed product.
It is worth noting that almost all apartments and townhouses, due to the nature of the product, are sold on a single contract. This is because with apartments and townhouses you are purchasing a final product, as opposed to a land and build split product. When looking for a new house and land package for an SMSF property investment you will need to ensure you find a specialist builder or developer who are offering a Single Contract Package, or find a newly completed home.
How much money do I need in my SMSF to buy property?
This question needs to be answered by a qualified financial advisor as there are many factors which need to be considered first. The amount required in a fund will vary across different funds and may depending on some of the following factors:
- The investment strategy of the fund
- The Asset Allocation of the investment strategy: ie what asset classes the fund’s investment strategy aims to invest in.
- Maintaining adequate diversification of assets. Avoiding having all of the fund’s assets in one asset class, or ‘eggs in one basket’.
- The lower LVR (loan to value ratio) associated with SMSF lending and therefore higher deposit required.
- Potential return of the property for serviceability
- SMSF rules and regulations.
- The price of the property the SMSF is looking to purchase.
It’s important to remember that the criteria for borrowing within an SMSF is often much stricter than that of other property loans. There is also often higher associated costs which need to be factored in. There has been some consensus amongst financial professionals and lenders that SMSF lending would not be considered for funds with less than $200,000.
Can I rent a property owned by my SMSF?
No, you cannot rent a property owned by your SMSF. As previously mentioned for a property to be purchased through an SMSF it must meet a specific set of rules. These are as follows:
- be for the sole purpose of providing retirement benefits to fund members
- not be acquired from a related party of a member
- not be lived in by a fund member or any fund members’ related parties
- not be rented by a fund member or any fund members’ related parties
As the above rules show, you cannot rent a property owned by your SMSF. When following a specific set of rules, a commercial property owned by an SMSF may be leased to a business owned by a member at the appropriate market rate.
How do I set up SMSF to buy property?
I have heard this question being asked by property investors, and there is an important point that needs to be made here…… You should not be setting up an SMSF for the sole purpose of buying a property. An SMSF must be run for the sole purpose of providing retirement benefits for members or their dependents. If purchasing a property falls within this purpose, then that’s fine, but it should not be the reason behind setting up the SMSF in the first place.
When you set up an SMSF you are in charge and you will be responsible for the investment decisions and you will be held responsible for complying with the super and taxation laws. This is a major financial decision and must be treated as such. It is best to seek counsel from a licensed and qualified professional.
The process of setting up an SMSF can be made much easier when appointing a professional to assist you, in some instances there are also sometimes package deals and off-the-shelf type products. It is vitally important that the fund is set up right from the beginning for taxation and contributions to be administered easily.
As you can see there is a lot that needs to be considered in the decision to purchase self-managed super investment property. Whilst there are many successful SMSF property investments that have taken place, it is vitally important that you decide based on your own financial circumstances.
It is worth making the point here that there have been examples of unscrupulous property sellers advising purchasers to set up SMSFs to purchase property. This should not be happening. Your decision to set up an SMSF should be based around providing for your retirement and preferably made in conjunction with counsel from qualified professionals.
Disclaimer: This blog article is only general information and is intended as educational material only. New Property Australia nor any of its associated or related entities, officers, directors or employees intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice from a qualified professional that considers your specific circumstances and objectives.
Adrian Webberly
Senior Investment Advisor
