5 Things You Should Consider Before Purchasing Property With SMSF - Superannuation Rescue

If your dream of owning an investment property seems to be at distant, then time has come to us your super fund to make it a reality.

However, before deciding if it’s right for you, you need to understand some complexities about purchasing a property with your Self Managed Super Fund.

Here are top 5 considerations to keep in your mind before you go any further…

1. Setting up a self managed super fund and a property investment strategy

An SMSF is a trust, where your hard earned money is controlled by trustees of the fund for the retirement aim of the SMSF members.

In Self Managed Super Fund, the members of the super fund are generally the directors or trustees of the company too. Thus, they have the power to decide where to invest the fund’s money.

Self-managed super funds are controlled by the Superannuation Industry (Supervision) Act 1993 (SISA). It is the supreme duty of directors to abide by this Act and the other rules & regulations concerning the super fund. There are specific super and tax rules & regulations, which the trustees/directors have to comply with when using their fund for investment.

If you don’t already have a self managed super fund, then very first step is to set up one. David Boyle is a certified SMSF specialist advisor who can help you to set up a SMSF.

After setting up a self managed super fund, you need to decide the investment strategy on where to invest this fund. Super funds can be invested in commercial or residential properties.

2. Understanding the exemptions

The exemption from this “related-party-rule” is a business or commercial property, which can be leased back to the related party or acquired from a related party.

For example, the members/trustees of the super fund can run a business from that property owned by the super fund, subject to a lease agreement and the rent being on commercial basis.

3. Understanding the limitations when purchasing property with super fund

With super fund, any investment property must be bought and maintained on commercial basis.

As stated in Sections 70B and 70C of the SIS Act, the directors/trustee of the fund can’t purchase a property for residential purpose from a related party, such as a business partner, trustee/member of the SMSF, their relatives, trust or SMSF company.

If trustee wish to invest in a residential property, then that property must be purchased from a party that is not related, at market-price and also rented out at market-price.

The trustee of the SMSF will then become the sole owner of that property. Trustees/directors and/or related parties are not allowed to live in such a residential property owned by the super fund.

4. When can you live in your property?

 The super fund members/trustees can only start living in that property after retirement after they have purchased it.

Point to be noted that this transaction is subject to stamp duty and capital gains tax, payable by the buyer of the property.

5. What to do if you don’t have enough in your super for buying property?

There is an option to borrow if any member of the super fund does not have sufficient money invested in the fund to buy property, however do have enough money for a deposit.

As per the rule, self managed super funds are not allowed to borrow under the SIS Act. However, Section 67 of the Act allows self managed super funds to do it under a LRBA (limited recourse borrowing arrangement).

The limited recourse borrowing arrangement rules are quite complex and require the set up a bare trust (holding trust) with corporate trustee/director. The holding trust will be the registered/genuine holder of the property until and unless the loan is repaid and the SMSF is a beneficiary of the trust.

If you want to purchase a property with SMSF, David Boyle at Superannuation Rescue can help you. David Boyle gives complete SMSF service with first consultation absolutely FREE and it can also be done over the phone. David will give you the general information you will need, and answer all your questions about Self Managed Super Funds and property investments to check if you further want to explore this option.