How to Go About It
The popularity of property acquisitions in SMSFs increased as a result of the passage of the Limited Recourse Borrowing Agreements (LRBA).
It allows SMSFs to use loans to buy a single property or a collection of identical properties with similar market value. The beneficial interest in the purchased property goes to the SMSF trustees. However, the holding trust retains the legal ownership of the property.
The good thing with an LRBA is that the entire super fund is not at jeopardy if the loan is defaulted. In addition, a debtor can recover funds only in a limited way.
Before taking the plunge, ask yourself these questions:
- If you purchase property using your super fund, what kind of property should you choose?
- What options are open to you if you don’t own an SMSF?
- Is creating an SMSF to acquire property worthwhile?
Owning a property in an SMSF has major benefits, including tax. The tax for your super fund is at 15 per cent, which is significantly lower compared to how much most people’s personal incomes are taxed.
The capital gains tax is lower if the property was sold during the accumulation period. There’s no tax if the property is sold during the pension phase of the fund.
However, there are several things you should be aware of if you plan on creating an SMSF specifically for the purpose of acquiring property, whether it is a building or a house.
Home Acquisition in a SMSF
An important fact to remember is that buying a house to live in, or for any family member to live in, is not allowed. There’s a rule preventing the fund trustees, its members, or any kin, from benefiting from the asset. The sole purpose of the property purchase is to support the fund’s investment strategy in increasing wealth for retirement.
Are the Savings in the Super Insufficient?
If you are planning to acquire property but your SMSF has insufficient funds or you’re not keen on going through an LRBA, another option you can explore is the Tenants In Common (TIC) agreement. It permits you to divide the loan between your family home and your super.
Commercial Acquisition in an SMSF
People often use their super to purchase a commercial property and rent it out through their business. However, you need to be aware of certain specific conditions if you are planning to do this:
1. Commercially competitive. Ensure the commercial competitiveness of the terms of the lease. Leasing it back for “mates rates” is not permitted as it gives you a financial edge. SMSFs are regularly monitored and audited by the ATO to make sure all transactions are compliant.
2. No rental holiday. During a downturn and finances are tight, you can’t skip paying the rent. You are required to pay rent on time, at all times, in full.
3. Valuations. Regular valuations must be done on the commercial property to ensure the compliance of the super. This process requires time and lots of paperwork.
4. Sole purpose test. The asset must pass the “sole purpose test,” which is to build wealth for the retirement of the fund’s members.
Still Determined to Proceed?
Ultimately, the decision to purchase a property using your super fund must be based on facts and professional advice. Ask these questions about your potential investment:
- Is the asset a sound investment?
- Will it increase in value?
- Are there risks involved? What are they?
- What is the return on investment?
To arm yourself in making the right decision, hire a qualified, independent third party to evaluate the opportunity and give their unbiased opinion. You may not be able to get objective advice from someone with a vested in selling the property.