Property FAQ

Can I buy property through my super?

You can invest in property through a self-managed super fund (SMSF). You may be able to invest in property indirectly through listed property trusts or as part of a large diversified portfolio that invests in certain types of property such as infrastructure or commercial property.

SMSFs can invest directly in residential and commercial property.

An SMSF can buy business premises or investment properties. As trustee of your SMSF (or a director of the corporate trustee of the SMSF), you have greater control over which property (or properties) your fund invests in. You choose which property to buy, manage the rent and any expenses and decide when to sell.

Before your SMSF buys property, you need to understand superannuation law and other relevant laws in this area. Importantly, the SMSF’s trust deed must enable you to buy property, and property must form part of your fund’s investment strategy. There are also restrictions on who you can buy property from and who it can be rented to.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

What property can an SMSF buy?

You can use your SMSF to buy residential or commercial property. However, any property held by your SMSF must meet the sole-purpose test of providing retirement benefits to fund members, or a benefit to their dependants if a member dies before retirement.

Residential property

SMSF’s are permitted to invest in residential property as long as you don’t buy the property from a related party of a member.

For example, you can’t own the family home through your super fund. Nor can you rent a residential property owned by your SMSF to a fund member, or to their related parties.

You can purchase an investment property that you rent to tenants who are not fund members or relatives.

Commercial property

SMSF’s are permitted to invest into commercial property, including your own business premises.

While the property still needs to meet the sole-purpose test of providing retirement benefits to its members, when dealing with commercial property, an SMSF can generally buy the property and lease it back to a member or a related party of the fund – including the member’s business.

An arm’s length sale price and lease arrangement is especially important when acquiring and/or leasing property to a member or related party of the fund.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I buy a residential investment property through my SMSF?

Yes, you can use your SMSF to buy a residential investment property. However, your fund’s decision to buy the property must be consistent with the sole-purpose test, or to provide benefit to a member’s dependants if the member dies before retirement. The investment return from the property through both rental income and capital growth must be the sole focus for making the investment and you must have no other purpose or motive in mind, such as living in the premises yourself.

There are strict restrictions on who your SMSF can buy the property from and who it can be rented to.

The property cannot be acquired from, or as a general rule rented to, a related party of the fund – the members of the fund and their associates and any standard employer-sponsors of the fund and their associates.

Before using your SMSF to buy property it’s important to understand superannuation law and other relevant law in this area. Importantly, your SMSF’s trust deed must allow for property to be bought and it must be consistent with your fund’s investment strategy. It is also important to ensure your fund has a diversified investment portfolio, adequate liquidity and a divestment strategy.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

I already own a residential investment property. Can I transfer this into my SMSF?

Transferring a residential property into your SMSF that you or a related party of your SMSF already own is prohibited under superannuation law. However, an exception applies if the property is classified as a business real property.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I buy my family home through my SMSF?

As a general rule, your SMSF is not permitted to buy any assets which are owned by you or any other related party of your fund. While there are some limited exceptions that apply to listed securities, business real property and in-house assets, your SMSF can’t buy your family home.

However, your SMSF can buy a residential property from someone who is not a related party of your fund. You can also rent that property out to someone who is not a related party of your fund.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I renovate a property owned through my SMSF?

If your SMSF owns the property outright, meaning your fund has not borrowed to buy the property, you can renovate or improve the property. However, if your fund has borrowed to buy the property (commonly referred to as a limited recourse borrowing arrangement) and the loan is still in place, you can only make improvements or renovations which do not change the character of the property. For example, a residential house that is converted into a restaurant, or a vacant block of land that is subdivided, resulting in multiple titles, would be considered changing the character of the property.

It is also important to note that if the renovations or improvements are not financed by the SMSF, but rather by the members themselves (or another entity), the value of the improvement or renovation will generally need to be recorded as a contribution made to the fund and will count against contribution caps.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I buy a property through my SMSF for my child to live in?

Your fund must be maintained for the sole purpose of providing retirement benefits to fund members, or a benefit to their dependants if a member dies before retirement. The investment return from the property through both rental income and capital growth must be the sole focus for making the investment. This means your children can’t live in the premises.

Even if your child pays a market rate of rent to live in the property, the superannuation rules do not permit a fund asset to be leased to a related party of the fund if the market value of that asset exceeds 5% of the fund’s value.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I buy my business premises through my SMSF?

Yes, provided the premises meet the business real property definition, and the property is acquired at market value. The property must also be wholly and exclusively used in a business.

It’s important to remember that such a purchase must also meet the fund’s sole purpose test of providing retirement benefits to its members, or a benefit to their dependants if a member dies before retirement. As such, the investment return from the property, through both rental income and capital growth, must be the sole focus for making the investment.

Where a fund buys an existing business property from you, or a related party of the fund (which includes most relatives and associated businesses), the purchase price must be at market value. In addition, if there is a tenancy agreement between the fund and the business it should be based on current market practice and prices.

You can also buy business property that is used in a business that you are not associated with. As an alternative to your fund buying your business premises, you may also be able to transfer it into your fund as an in specie (non-cash) contribution.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I buy a beach house for family holidays through my SMSF?

For superannuation purposes, you cannot generally live, or even reside temporarily, in any residential property owned by the SMSF, including a beach house.

Your fund must always comply with the sole purpose test.

The sole purpose test means the investment return from the property through both rental income and capital growth must be the sole focus for buying the property and you must have no other purpose or motive in mind.

Generally, your SMSF can buy a beach house that you rent out to tenants who are not members of the fund, their relatives, or other unrelated parties of your fund.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I buy a rural property through my SMSF?

An SMSF may generally invest in rural property, providing it meets the fund’s investment strategy, and considerations such as liquidity, diversification and cash flow are all fulfilled. The purchase also needs to meet the sole-purpose test of providing retirement benefits for its members, or benefits to their dependants if a member dies before retirement.

Additionally, rural property used in a primary production business will satisfy the definition of business real property even if not all the property is being used for commercial purposes.

This means an SMSF can buy a rural property from a related party at market value, even if a member, or another related party of the fund, lives on the property. It also means that once the SMSF has acquired the property, it can be leased to a related party of the fund at market rates without breaching the rules.

This concession applies as long as the area of the property being used for domestic or private purposes is no larger than two hectares and the property is not being used predominantly for domestic or private use.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I live in a property that I’ve bought through my SMSF?

You generally cannot use the assets of an SMSF for private or personal use under the sole purpose test. Essentially this means you cannot use the property as your private residence, although some exceptions apply to rural properties. You also cannot use the property as a holiday home, or rent it to family members. Generally this is the case even if you or the family members agree to pay a market rate of rent to live in the property.

However, if the property meets the definition of business real property, you can lease the property to your business as long as it is at a commercial arm’s length basis. An example of this might be where your SMSF owns an office suite, or a warehouse.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I pool my SMSF with a friend or family member to buy an investment property?

Your SMSF can co-own an asset with another entity, including friends and related parties.

However, you need to be aware of the rules which prevent your SMSF from acquiring all or part of a property owned by a related party of your fund, and which prevent your SMSF from renting a property which it owns, either in part or full, by your fund to anyone who is a related party of your fund.

The rules do not apply if you are buying a property from a related party, or leasing it to a related party under the business real property rule and it is done at market value (generally a property is considered to be business real property if it is used wholly and exclusively in one or more businesses).

There are also rules which prevent an asset, which is owned either in part or full by your SMSF, from being used as a security.

There are different ways an SMSF can co-own an asset. For example, you could use a tenants-in-common agreement or, alternatively, you could co-own a property through a unit trust or company structure. Each approach has its own advantages and disadvantages. Co-ownership arrangements involving an SMSF can be complex so it might be worthwhile talking to an expert in the field.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I borrow to invest in property through my SMSF?

Yes. However, there are strict rules governing how the loan and subsequent property purchase must be structured when using borrowed money inside an SMSF.

Borrowing through an SMSF to invest in property must be done under a special loan structure called a ‘limited recourse borrowing arrangement’. These arrangements can be quite complicated and generally require professional advice.

For example, you need to keep the property separate from the fund’s other assets. This ensures that if the fund defaults on making loan repayments, the bank and any interested parties will have recourse over the property, but not the other fund assets. To achieve this, you need to establish a security trust which will recognise the beneficial interest of the SMSF in that property and the rights of the lender under borrowing rules. The trustee of this security trust holds the property in trust with the SMSF as the beneficial owner.

Borrowing to invest in property also involves different loan conditions for an SMSF compared with regular housing loans. The maximum loan amount relative to the property’s value will generally be lower and you need to consider a number of conditions and risks.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

There could be several benefits of buying property through an SMSF.

Tax savings

If you buy and hold property within your SMSF until you retire and then start drawing a pension from your fund, when the fund sells the property, the transaction will generally be exempt from capital gains tax. Also, any income your fund receives (ie rent) while you are drawing a pension will be completely tax free.

Before you start to draw a pension from your SMSF, any rental income generated will be taxed at a maximum of 15%. And, if the fund sells the property after holding it for at least one year, your fund will only pay capital gains tax on the sale of the property of up to 10%.

Comparatively, if you were to buy the same property in your own name, rental income would be taxed at your personal tax rate (which could be as high as 46.5%). This tax rate would also apply to any capital gains payable on the sale of the property (albeit after receiving a 50% reduction if the property was held for more than one year).

You may not be able to afford to buy property in your own name; however, you and other members of the fund might have a reasonable amount of combined super saved inside your fund. Buying property through your fund might be a good way for you to achieve your goal of owning an investment property or owning your own business premises.

Benefits for business owners

If you own your business premises through your super fund and you lease it to your business, you rent you pay to your SMSF is generally tax deductible to your business. Given the relatively low concessional contribution limits that are currently available, paying rent to your super fund could be a great way to accelerate your retirement savings without exceeding the contribution limits.

Asset protection

Assets held in a superannuation fund (including property) are generally protected from creditors in a bankruptcy. However, before you decide to invest in property through your SMSF, you should consider these points:

  • Investment – any property investment must align with your SMSF’s investment strategy
  • Diversification – property generally has a significant value and may reduce diversification in your portfolio, depending on the value of your fund’s other investments and what asset classes they are in
  • Liquidity – the nature of property could make it difficult to dispose of quickly. You should check whether your fund is sufficiently liquid and able to pay expenses and benefits when the need arises without having to sell the property at short notice.

We recommend that you speak with a financial adviser to help you decide if buying property through your super fund is right for you.

Can I buy an overseas property through my SMSF?

All of an SMSF’s investments must meet the requirements of its investment strategy including liquidity, diversification and cash flow, and the sole-purpose test for the provision of retirement benefits for its members. While an SMSF can hold overseas property, you will need to consider the laws in that country, particularly in respect of how or to what extent a foreign entity (an SMSF) can own land.

The main issues surrounding investing in overseas property generally involve the practical aspects of satisfying the relevant laws of the foreign country and how these relate to Australian superannuation law. Following are some of the major considerations.

1. No charge over the property

Generally an SMSF asset is not allowed to have a charge against it. A charge may be a bank loan, or the asset may be security for another loan. With real property, the auditor of the SMSF would generally do a title search at the end of each year to confirm ownership and no charges are held over the property. It can sometimes be difficult to obtain documents confirming no charge is in place over a property in countries where there is no Australian-style register of titles. If documents relating to the property are not provided in English, they would have to be translated to prove ownership. This could result in additional fees.

2. The entity that holds the property

In several countries, a foreign entity such as an SMSF cannot hold property directly. One option is to establish a local entity that buys the property, with the SMSF owning all the interests in the entity. This structure is quite complex and should be discussed with a financial adviser.

3. Different laws and customs

You need to carefully consider the laws and customs of the country where you intend to buy the property. Remember that issues can arise over applicable tax, and landlord and tenant laws. For example, in some US states, authorities have the power to sell property where there are outstanding fees. This would result in Superannuation Industry Supervision (SIS) compliance issues in Australia, under the SIS Act 1993.

4. Payment of taxes

The investment entity may need to be a taxpayer in the country in which you buy the property. This may mean you have to lodge additional tax returns and pay extra taxes. In this case, you’ll need additional specialist assistance, probably from an expert in the country where the asset is located.

5. Local real estate agents

The property is expected to receive rent and the SMSF would be expected to pay for all expenses related to the property. However, doing this from Australia could be impractical, particularly if you establish an overseas bank account. A locally based real estate agent could run an account for the SMSF, with rent and expenses being channelled through this account. In this scenario, the trustees would need to ensure they received regular statements and had an agreement in place covering how frequently net proceeds would be transferred into the SMSF.

6. Foreign currency

The trustees of the SMSF need to consider the risks associated with fluctuations in foreign currency and exchange rates. All superannuation assets need to be converted into Australian dollars for financial statements, so they will be affected by movements in the exchange rate. These variations could in turn affect other superannuation calculations such as member balances and minimum pension levels. Additionally, you should be careful when considering the tax treatment on profits that may result from currency movement.

7. Sovereign risk

You also need to consider sovereign risk. A foreign government could change the rules relating to taxation or foreign investment. This could result in the SMSF no longer being able to own property in that country. In fact, there is even the possibility of the foreign regime resuming ownership of their domestic assets from foreigners without compensation.

You should also consider that residential property cannot be leased to a related party of the SMSF and it would not be possible for members or relatives of the fund to use the property personally.

You should talk with a financial adviser if you are interested in purchasing overseas property within a superannuation fund.

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