Thinking about a SMSF Property?
We have been told that now is a great time to invest in a smsf property market, why not invest in property using your SMSF? Since the GFC, people have become increasingly aware and conservative when it comes to investing. Property is seen as a safer investment in comparison to something a little more risk intensive, such as trading stocks. For most people, property within a SMSF is a safe, reliable and profitable investment option, however, below are 10 things you need to know when investing in property through your SMSF.
1. SMSF must have an investment strategy
No SMSF can exist to create wealth without an investment strategy. An investment strategy is a set of rules or guidelines as to how a trustee intends to invest funds and contributions on behalf of members to achieve their objectives.
An investment strategy can be simple, but it must include specific, measurable, actionable, realistic, timely strategies to: maximise member investments, provide diversification across assets, include a strategy for paying benefits and maintaining liquidity, and take into account each member’s personal situation and circumstances.
Without a strategy, trustees will not be able to determine how direct or indirect property fits into their SMSF portfolio, or what exposure they need to maintain at particular stages in life with respect to when members retire. It is recommend that you make an appointment with your Discover Super Advisor in order to discuss your investment strategy.
2. SMSF can invest in any property type or sector
Generally speaking, a SMSF can purchase just about all types of property (including vacant land) which includes residential, commercial, factories, medical suites, office space, and more.
In order to invest widely in any type of property, trust deeds must include provisions allowing direct property as an approved investment. It must also be flexible enough to match the risk profile of the member.
It is recommend that you make an appointment with your Discover Super Advisor and Real Estate Agent, in order to together discuss your property options.
3. SMSF can’t buy property from a related party
It is against the law to buy an asset including property from a related party. All investments must be strictly at 'arm’s length'. Related parties to a SMSF include all members and associates of a fund; employers; and their associates.
The definition of associates of a SMSF member is wide and includes: every member of the fund; relatives of each member; business partners of each member; and any spouse or child of business partners; and any company or trust controlled by a member or associate. This ensures that the transaction is made purely on a commercial basis and avoids potential conflict of interest.
There are three specific exceptions clearly defined by the ATO where an asset may be purchased from a related party, including: a listed security acquired at market value, business real property acquired at market value, and certain ‘in-house’ assets. Although this is the case, it is recommend that you make an appointment with your Discover Super Advisor to discuss your options.
4. SMSF can buy your business property
The good news for business people is that an SMSF is allowed to invest in, or buy your business premises, provided it is used wholly and exclusively for the business.
When a superfund buys the business premises of its member, the business simply becomes the tenant and pays the SMSF a commercial rate of rent.
When deciding to transfer business real property into their SMSF, trustees must take into account:
- overall fund investment strategy
- how this will affect all members
- how it will affect liquidity
- whether such a transaction will dilute diversification of benefits through the creation of a concentrated exposure to one asset
It is recommend that you make an appointment with your Discover Super Advisor to discuss your options.
5. Can I develop a SMSF property
Due to the complicated nature of the process, seeking an appointment with your Discover Super is highly recommended in order to take into account individual circumstances of the members and their fund, as well as the specific profile of any proposed development activity.
6. SMSF can borrow to buy property
Under the new guidelines, an SMSF can borrows funds to acquire an asset, for example a residential or commercial property. A separate trust is established to hold legal ownership of the property on behalf of the SMSF. These trusts are generally referred to as security trusts or warrant trusts. A loan is then arranged to meet the balance of the purchase price (plus costs) that the SMSF is not providing. The SMSF becomes the beneficial owner and manages the property as it would any other real estate investment.
It is recommend that you make an appointment with your Discover Super Advisor to discuss your options.
7. Family and associates are not allowed to stay or rent SMSF residential assets
SIS law is very strict about residential property owned in SMSFs as an investment, including holiday property investments, and will enforce heavy penalties. They simply cannot be used by members or any related parties. Members including their family, associates and business partners are restricted in using the assets of the fund unless they are business real property, and then only if they are solely used for business purposes by a member or related party, and only where commercial rates of rent and lease terms are being provided to the SMSF which owns the asset.
It is recommend that you make an appointment with your Discover Super Advisor to seek clarification about this ruling and discuss your options.
8. SMSF allows you to buy a retirement home
In retirement, people need an income, and a place to live. One of the most fundamental superannuation questions is whether a member can acquire a residential property asset in their SMSF that will eventually become their retirement home.
For example, a couple aged 50 might acquire an ideal investment property on the beach using their SMSF, either with cash, or with some allowable borrowings. The property in the SMSF is rented out, and the rental income plus contributions (any salary sacrifice plus any employer contributions) flow to the SMSF, less the 15% contributions tax. As cash builds up within the SMSF, the trustees use this money to pay off the loan that funded the original purchase. After 10 years they decide the sell their primary residence and pay no capital gains tax. They may then proceed with their plans to purchase the property off the SMSF (providing tenants have left).
If just before they purchase the property off the SMSF, they convert the fund into an allocated pension, as assets sold in pension phase pay no capital gains tax (CGT), then there will be no CGT on either property (although stamp duty is still payable). Purchase profits in the superannuation environment pay them as tax free income (assuming 60 years of age and over) and they get to live in the dream beach-front home, purchased 10 years ago using their superannuation, in their retirement.
It is recommend that you make an appointment with your Discover Super Advisor to discuss your options.
9. SMSF benefit in the super tax environment
As with all investments in a complying SMSF, because contributions and investments in the fund are preserved until retirement, they enjoy the beneficial superannuation tax regime.
The beneficial superannuation tax environment means that income and capital gains earned from a SMSF Property provide greater reinvestment value, being the difference between a member’s individual tax rate on income and capital gains, less the tax rate they pay within the superannuation environment.
10. SMSF must satisfy the law
It is mandatory that trustees, understand the laws involved with the governing of superannuation legislation (SIS). However as trustees of a superannuation fund they must also understand their obligations under the: Corporations Act and the relevant taxation laws.
For trustees of SMSFs there are no excuses for not complying with the law, and the rules outlined in the trust deed and the investment strategy. Trustee obligations to the members of their funds are regulated by ASIC and the ATO. Penalties for not following these rules can include: your SMSF becoming non-compliant and losing its preferred tax status, the trustee(s) becoming disqualified to act as trustees, prosecution under law, and a range of significant penalties including imprisonment for criminal breaches of the law.
It is for this reason, that you feel comfortable with your Discover Super Advisor, and are able to share and discuss personal issues and legalities of your SMSF Property.
At Discover Super, we are dedicated to helping you.
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