SMSFs and Property

Combining your self-managed super and real estate

You could choose to establish a self-managed superannuation fund (SMSF) for the primary purpose of investing in residential property. In this article, we will explain the circumstances in which you can utilize your SMSF to invest in property, as well as the factors that you need to take into consideration before doing so.

• Self-managed super fund property rules
• How much it will set you back;
• Borrowing from the SMSF;
• Property developers and SMSFs

Property regulations for self-managed super funds

If you are in compliance with the requirements, you will be able to use your SMSF to purchase real estate.

The property:

• Must pass the "sole purpose test" and demonstrate that the fund's primary objective is to offer retirement benefits to its participants;
• Must not have been obtained from a member's family or other close relatives;
• Must not be occupied by any member of the fund or any party affiliated with any member of the fund;
• Must not be rented by a member of the fund or any party affiliated with a fund member in any way.

However, if your SMSF were to purchase your business premises, you would be able to pay rent straight to your SMSF at the going market rate. This would be a significant advantage.

For further information, please refer to the self-managed super funds webpage that is hosted by the Australian Taxation Office.

What it will cost you

There are likely to be a variety of fees and charges associated with SMSF property sales. These charges might mount up over time, which will result in a lower super balance.

Before you commit, it is important that you have a full understanding of the following costs:

• Ongoing property management fees
• Bank fees
• Legal costs
• Advice charges
• Stamp duty
• Upfront fees

Be aware of the fees imposed by groups of advisers that endorse each other's services. It is critical to obtain advice from a source that is independent of any other influence. In Australia, a licence to provide advise on self-managed super funds (SMSF) is known as an Australian financial services (AFS) licence. If a corporation or individual in question possesses an AFS licence, you will be able to determine this through ASIC Connect's Professional Registers.

See investing in property for more information.

Borrowing from the SMSF

When you invest your funds for retirement in real estate, you are subjected to what is known as a "limited recourse borrowing arrangement," which has extremely stringent borrowing constraints. You must comply with these limitations. This is the situation due to the fact that investing in real estate puts you at danger of losing all of the money you put into the venture.

It is not possible to use a limited recourse borrowing agreement to finance the acquisition of more than one asset at the same time. For instance, a limited recourse borrowing agreement cannot be used to buy a residential or commercial property. Before you decide to purchase the geared property investment, you must first ascertain whether or not the investment strategy and risk profile of the fund are suitable for the geared property investment. If they are, then you may proceed with making your purchase decision.

The following are some instances of property concerns that a geared SMSF may be exposed to:

• Higher charges are typically associated with SMSF property loans as compared to conventional property loans; this information needs to be taken into consideration when making an investment decision.
• Cash flow - Your Self-Managed Superannuation Fund (SMSF) is responsible for making loan repayments, which means it must always have sufficient liquidity or cash flow to meet the loan repayment obligations.
• Hard to cancel - If the property loan documentation and contract associated with your SMSF are not set up correctly, you might not be able to unwind the arrangement. Instead, you would be obliged to sell the property, which could result in significant financial losses for the SMSF.
• Possible tax losses - If you earn money outside of the fund, you won't be able to deduct any tax losses that arise from the property from the total amount of income that is subject to taxation.
• No alterations to the property are permitted so long as the loan on the SMSF property is still being paid off. It is against the law to make alterations to a piece of property if those alterations would in any way change the character of the land.

Learn more about the dangers of gearing by reading about borrowing money to invest.

Developers of real estate and SMSFs

If they want to offer financial planning advice to their clients, property developers need to acquire a license issued by the Australian Financial Services (AFS). This offers instructions on how to establish an SMSF.

There is a potential that the real estate developers have an existing professional relationship with the specialists that they have recommended. They might be qualified to get a referral fee or other benefits that, when added up, might be worth several thousand dollars.

There should be no pressure put on you to make decisions about the purchase of property for an SMSF. Be wary of gimmicks used in the sales process such as contests, free flights to sales meetings, or being taken out for free dinners. Make it a priority to seek out the guidance of an AFS-licensed professional for your financial needs. You can check for sales incentives using the talking points that are provided in our SMSF guide.

If you're not familiar with the local real estate market, you should probably think twice about investing there. Instead, you should perform some independent research first.