Purchasing property within the self managed superannuation fund environment has become increasingly popular, but make sure you understand the rules as breaches can result in significant fines and penalties.
Brendan Watson highlights key issues to be aware of when purchasing residential or commercial property within an SMSF.
Your investment strategy
First things first – your investment strategy must allow for the trustees to purchase this type of asset class. It is a breach of the rules to purchase a property and then amend the investment strategy to suit.
Your property purchase must be at ‘arms-length’, meaning the contract price should reflect market value and not be with a related party. One exception allows an SMSF to purchase a commercial property from a related party and then receive rent directly from the related party business at market rate. This increases tax effectiveness and the fund balance. However the definition of a related party is very broad, so care and advice should be taken.
Use of property within SMSFs
Members are specifically excluded from using the SMSFs assets for their own benefit or that of relatives or friends. This means an SMSF would breach the rules if, for example, it was to purchase a holiday investment property and the members of the SMSF use that accommodation, even just for a few weekends per year. Trustees can also breach the rules if their SMSF purchases an investment property for their children to live in whilst at university – even if there is a lease in place. Property within an SMSF must only be leased to external parties at market rates.
Ordinarily SMSFs are taxed at concessional rates, making purchasing property inside this structure very attractive. Depending on the ages of the members, the current phase of the SMSF and the type of return from the property (i.e. rental revenue or realised capital growth), the applicable tax rate will vary between 0% and 15%, representing a significant tax saving compared with purchasing property outside super where marginal tax rates are up to 47%.
As a result, a significant number of SMSFs are being set up to purchase property with borrowings, and the rush of activity hasn’t gone unnoticed by the Australian Tax Office. The Government has been advised to consider preventing SMSFs from borrowing for the purchase of property (and other assets) in the future. No decision has been made as yet.
Is purchasing property within an SMSF a good investment?
It is a difficult question to answer without considering each circumstance individually. Given the flexibility and tax benefits, buying property within an SMSF can be a very good investment, however it is not without risk. Therefore you should seek professional advice before making any decision.
Setting up and effectively running a SMSF (with property or not) requires a certain amount of time and skill, but with the right advice and appropriate help, it’s not all that hard. Please contact your local Accru Advisor if you would like to know more.