Self-Managed Super Funds (SMSFs) allow individuals to take control of their retirement savings and invest in assets they have confidence will be right for their retirement strategy.
Property investment is a popular choice for many SMSF trustees. However, it’s crucial to understand the rules and regulations surrounding this investment strategy.
Understanding the rules
Let’s explore the golden SMSF property rules of holding property by your SMSF!
The Importance of your role as a Trustee of your SMSF
Before delving into the specifics of property investment, it’s essential to emphasise the importance of responsible SMSF management. As an SMSF trustee of your Fund, you have a fiduciary duty to act in the best interests of your members and beneficiaries. This is fundamental behind the SMSF property rules.
This means prioritising the maximisation of retirement savings as the sole purpose of your SMSF. All members in an SMSF need to be Trustees. They must understand the rules and regulations, and understanding your obligations is crucial to ensure compliance and protect your members’ financial well-being.
Common Property Investment Misunderstandings when it comes to SMSF property rules.
Investing property through an SMSF can be more complex than many trustees initially assume. T
To help you navigate this investment strategy successfully, let’s address some common property investment misunderstandings and provide valuable insights into the rules and regulations.
Location and careful planning is the key, but SMSF Rules Apply.
Selecting a property that has a return and can be sold when it is right is important. Buying and trying to borrow for an SMSF purchase in Humpy Doo won’t get Bank support. It also may be hard to sell down the track when it comes to realising assets for retirement. Property investment for retirement needs clear objectives, and using emotion and ideas of holiday thoughts is the wrong approach.
It’s important to note that the SMSF property rules and regulations significantly impact structuring the SMSF property purchase. While you may have extensive knowledge about property investment, you must familiarise yourself with the specific rules that apply to SMSFs.
The Superannuation Industry (Supervision) Act (SIS Act) governs how you, as a Trustee, can operate your SMSF. It’s crucial to understand the rules and regulations it entails. Interactions between different sections of the SIS Act can make navigating SMSF property investment complex.
Limitations on Property Ownership
When it comes to property ownership within an SMSF, certain limitations apply. If you get them wrong, it can be disastrous and costly. General rules you need to understand before committing to a property contract for your SMSF.
1. You cannot purchase a residential investment property owned by you, any related individuals, or any companies or trusts you, including any related individuals, control. It’s essential to be aware of this restriction and avoid any schemes or attempts to circumvent the rules.
The SIS Act includes an anti-avoidance provision that imposes significant fines and potential imprisonment for those caught trying to bypass the regulations.
2. You can buy a commercial property you own, but proper valuations etc. apply. Please seek our advice advice in this area.
3. You should never buy a residential property for an SMSF borrowing situation where there are two contracts i.e. one for the land and one for the build
What are the consequences of circumventing the SMSF property rules and regulations?
It could be costly to get it wrong. This could include fines, making your fund non-compliant or worse still trying and reverse the transaction.
Restrictions on Personal Use of SMSF-Owned Property
Note any property owned by your SMSF, including beach houses or apartments, etc. cannot be used by you or any of your relatives. Even renting the property to relatives at market rates is not permissible. Some attempt to circumvent the rules and this could lead to severe penalties. It’s essential to prioritise compliance and act responsibly to protect your SMSF and its members.
Limited Recourse Borrowing Arrangements (LRBAs) and Property Investment
LRBAs can be a valuable tool for funding property investments within an SMSF. You cannot Cross-collateralise SMSF properties. Therefore, this means multiple properties are used as security for a single loan. Each property needs to have its own bare trust and loan arrangement. It’s important to seek professional advice when considering LRBAs to ensure compliance with the regulations.
The Character of the Asset and LRBA Limitations
When using an LRBA to fund your SMSF property investment, it’s important to consider the character of the asset. This means the loan proceeds must only be used to acquire a single asset.
The fund cannot change the character of the asset while the loan is in place. I.e. cannot split the property or convert a property into a commercial space or enterprise.
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Purchasing a property investment within an SMSF can be a complex undertaking. We offer advice as a Superannuation accountant, and as a licensed financial accountant in SMSF, we can help you make informed decisions. Plan your property purchase and ensure it is done correctly to meet your investment strategy and long-term retirement planning needs.