Buying property through SMSF – what are the rules?

If you run a self-managed superannuation fund (SMSF), you can invest part of your super, and borrow money within your super, to purchase either residential or commercial property. Buying property through your super has many advantages and is a great way to build up your retirement savings, however there are also a number of special rules that apply to property when it is owned by an SMSF.

Sole purpose test
To be eligible for tax concessions your SMSF needs to meet the sole purpose of providing death or retirement benefits to its members. This means that when investing in property through your SMSF a trustee or a relative cannot live in the property, this would be considered personal use of a fund asset for pre-retirement benefit.

Related party rules
An SMSF cannot buy residential property from any related party. In the context of an SMSF, a related party includes members and trustees of an SMSF as well as their relatives and any associated companies and trusts. There are however exceptions if the property is used for commercial purposes. For example, as a small business owner your SMSF could own the premises from which your business is run and lease it back to the business at the market rate.

Borrowing money to purchase property within SMSF
Since 2007 the laws around borrowing within SMSF have been relaxed, however they are still subject to strict requirements. Borrowing for property investment within SMSF must be done through a limited recourse borrowing arrangement (LRBA). Limited recourse means if you default on the loan, the lender can only take back the asset with the loan against it, not the SMSF’s other assets.

It’s important to keep SMSF assets separate from personal assets. Not only is this a requirement under super laws, but it will also protect the fund assets from personal financial disputes. Taking out an LRBA also has cost implications including ongoing compliance and legal fees, stamp duty, property management and bank fees.

When borrowing money within SMSF there are rules that apply to what the money can be used for. Spending borrowed money on property repairs and maintenance is ok, but spending borrowed money on anything considered an improvement to the property, such as adding an extension, is not allowed.

If you’re considering buying property through SMSF it’s important to research and understand the rules, or seek help from a professional financial advisor before making a purchase. A YML Financial advisor can help you decide if buying property through your super fund is right for you, talk to us today.