You want to invest in property via a SMSF what do you need to consider?
There are different rules around Residential property than Commercial property when investing via a SMSF:
If buying a Residential Property you cannot purchase this from yourself or a relative or related party entity. You also need to know that you cannot lease a residential property to yourself or a relative even if market rent was paid.
The sole purpose test that applies to SMSFs requires that investments are bought only to build the retirement benefits of members NOT to benefit members. So members and relatives cannot use the property for their own benefit at any time whilst owned by the fund. Many people considering buying a property via the SMSF so that their son or daughter can live in it while they are away at uni – this is not allowed. Nor is buying a holiday property for you to use for your holidays whilst it is owned by the SMSF.
If choosing to buy commercial property that your business will operate out of be aware that you will need the involvement of independent valuations for rent and the value of the property on a regular basis.
The SMSF must issue a written lease to the business on commercial terms and the business must ensure it adheres to the agreement. This means paying the rent on time at commercial rates. The benefit of holding the property in super is the asset protection it achieves by being away from the business trading risks. In addition it is a way to get more money into super that is not subject to the contribution caps (provided rent paid at market rate)
If you want buy in a SMSF and need to borrow how does this work?
A SMSF can undertake a limited recourse borrowing arrangement (LRBA) in order to purchase property and other assets. They have increased in popularity but are subject to much speculation as to whether they will remain an option for SMSFs longer term. Arrangements in place prior to any change will be able to continue but there may be restrictions around refinancing and the like – it is all unknown at this stage. But we do know it is available today if it is set up correctly.
Here is how it works:
The benefit is that the lender’s recourse is only to the asset acquired under this arrangement. If the loan is defaulted on they do not have recourse to any other assets held by the SMSF. The downside is that there are significant upfront costs to establish the structure and bank legal fees that you wouldn’t incur if you bought it in your own name or the SMSF could afford the property outright.
The hard part is getting the appropriate documentation in place at the right time and ensuring the right name goes on to the title and the appropriate forms are lodged with stamp duty and title office at the required times. If borrowing via a bank the transaction can take longer due to the review of all the legal documents required so you need to factor this in to settlement periods. It is imperative that you use legal and administrative businesses that deal with this regularly so know they know process and can get you through it in the most efficient way.
Property in a SMSF can be appropriate where you have the right mix of members, member balances, time of life and it fits your strategy and risk profile. Don’t forget to factor in an exit strategy in the event of divorce or death of a member.
Do your homework
Whichever property scenario you are looking at whether it be for a SMSF or yourself personally the homework is much the same. You need to consider whether it is appropriate for your stage of life, how it can be financed along with yield, expenses and capital growth expectations. Work all this through some cashflow planning and you can make an informed decision.
There are alternatives to LRBAs to finance and hold property with a SMSF depending on the property and your circumstances so it is important you discuss your needs with qualified SMSF Advisers.
Think you might want to invest via a SMSF but don’t have one yet?
What are the advantages of super as an investment vehicle?
Should you have a Self Managed Super Fund?
This depends on a lot of factors and you should speak to your adviser before making a decision. Some things that can sway into the decision:
You get to choose your own investments
Do you have the time to manage the investments and associated paperwork?
Can be a fixed fee rather than % of assets fee arrangement
You need to ensure annual compliance requirements are met including account preparation and audit
Control over the timing of transactions eg when to sell an asset as to whether you pay tax on it or not
You are able to make mistakes eg pick up the wrong cheque book or fill in the wrong name on forms
Estate Planning strategies that may reduce tax to non-dependents or control/give flexibility to how/when benefits are paid out.
You may have a complex family arrangement that requires documentation to be put in place to ensure benefits go the way you want.