To buy an investment property with an SMSF, you need to follow some rules and steps, such as creating an account, borrowing funds, increasing capital, and more. Good news, you can buy residential and commercial property with super funds.
Are you planning to buy a property through your super fund in Australia? Well, you are not alone. Many first-time home buyers and investors are using SMSF – Self Managed Super funds for buying a home or land in the country.
But, like other investments, there are some rules and regulations for purchasing investment property through these funds. In this article, we will walk you through what an SMSF is, how to use them for buying a home, what the restrictions are to use them, and more.
What is an SMSF?
As the name suggests, an SMSF is a private super fund that you manage yourself. Apart from you, a group of up to six involved members or trustees can manage too. No matter if the funds are in the form of shares, cash, or property, you are in control of your investment.
But, as always, control comes with responsibilities, as the Australian Taxation Office (ATO) has a clear set of rules to ensure that you use your SMSF only for retirement purposes.
What are the Australian Taxation Office (ATO) restrictions for an SMSF to invest in property?
Here are some of the main restrictions of using an SMSF for property investment:
- The property must be purchased only for investment purposes, not for personal use.
- You cannot live in the property owned by your SMSF.
- The property cannot be rented to you, members, relatives, or related third parties.
- SMSF funds must follow strict borrowing rules when taking a loan to buy property.
- The property must pass the sole purpose test, meaning it must only provide retirement benefits.
- You can’t use personal funds for any of the expenses related to investing in property, including Ongoing property costs, such as insurance, council rates, repairs, repaying loans, etc.
Can You Buy Property In An SMSF?
The answer is yes, although there are conditions. You cannot simply withdraw money from your super to buy a property in your own name. When your SMSF purchases an investment property, the fund owns the property, not you personally. This is an important distinction.
Here’s a step-by-step process to follow.
Step 1: Set Up your SMSF
First, you must set up an SMSF with a clearly defined trust deed and appointed trustees. These are the members who will either act as individual trustees or directors of the trustee company. Also, register your SMSF with ATO to receive a Tax File Number (TFN) and Australian Business Number (ABN).
Note: The SMSF must also pass the sole purpose test, which means the only objective of this fund is to offer retirement benefits to its members.
Step 2: Roll over your super fund balance
Once your SMSF is set up, the next step is to transfer your existing super into the SMSF. This creates additional capital that you can use to cover the costs for property investments, such as stamp duty, legal fees, etc. Also, your SMSF should maintain liquidity for ongoing property expenses.
Step 3: Apply for Limited Recourse Borrowing Arrangement (LRBA) if needed
It is possible that your SMSF doesn’t have enough capital to invest in property in Australia. So, in that case, your fund may borrow under a Limited Recourse Borrowing Arrangement (LRBA).
But it can be a little more complex than taking out a standard mortgage. There are strict conditions on banks and lenders, such as larger deposits and higher interest rates. Also, loan repayments must be made through your SMSF bank account only. Moreover,
Step 4: Buy investment property under the correct name
Make sure your contract is registered under the correct name. If an SMSF is buying property outright (with cash), then it must be registered in the name of the SMSF funds. Now, the MSF settles on the investment property and becomes the legal owner.
Step 7: Manage the property and rent
Once purchased, the property must continue to comply with SMSF regulations. If you rent the property, the rental income should flow back into the SMSF and is taxable. Also, the rent must always be charged at market value.
Note: For residential property, you can’t use it personally or can’t allow related parties to benefit from it. For commercial property, compliance with lease agreements is essential.
In Which Property Can You Invest With an SMSF?
You can invest in both residential and commercial properties with an SMSF. But the rules for both are different.
Residential investment property
- You can use this invested property only for retirement benefits and not for personal use.
- Rent this property to unrelated tenants who can’t be your family, relatives, or SMSF members.
- You cannot purchase property from members or related parties, except under specific conditions (e.g., business real property).
Commercial investment property
- You can invest in commercial property with an SMSF and can lease it to a business owned by the trustee or a related entity.
- For renting this property, a legally binding lease agreement is necessary.
- Rent should be at market value and needs to be recorded in the SMSF accounts.
- Rent must be paid on time and deposited into the SMSF’s bank account.
Don’t know how to buy an investment property with an SMSF? If yes, call Property Buyers Australia or connect with our communities/groups of experienced property agents or lenders. We can help you with everything from paperwork to property selection in Australia.
