To maximise the value of any investment by an SMSF in property, it is crucial that trustees obtain advice to determine if this strategy is suitable. Shubha Rao, Senior Associate in our Property Law team, explains.
It is a common strategy for investors to purchase properties through their self-managed superannuation funds (SMSF). While such a plan may be in line with an SMSF’s investment strategy, SMSFs are highly regulated and SMSF trustees must be aware of the regulations to ensure that any property purchases are conducted within the rules for SMSFs.
What conditions apply to the property purchase?
For SMSFs to purchase property, the following general criteria must be satisfied:
- The purchase must meet the 'sole purpose test' (i.e. for the purpose of solely providing retirement benefits to fund members);
- The property must not be acquired from a related party of a fund member;
- The property cannot be lived in by a fund member or any fund members' related parties;
- The property cannot be rented by a fund member or any fund members' related parties (unless the property is commercial property and the terms are competitive commercial terms); and
- The deposit for the purchase must be paid from the SMSF.
Purchasing property with loan funds
If trustees are intending to purchase the property with loan funds, there are a number of additional factors to be taken into consideration. To borrow funds, an SMSF can only enter into a limited recourse borrowing arrangement (LRBA). The key factors to be considered with respect to LRBAs are as follows:
- A separate bare trust will need to be set up with the bare trustee (usually, a corporate trustee) being the registered proprietor of the property.
- Under an LRBA, should there be a default on the loan, the lender’s rights must be limited to the property held under the bare trust only, which serves to quarantine any other assets of the SMSF from the lender.
- There must be a “single acquirable asset”. This means that if a building is on one title and a carpark on another title, then either cash will need to be used by the SMSF to purchase the carpark, or a further separate bare trust needs to be established and another LRBA entered into with the trustee of the further bare trust.
- Pursuant to an LRBA, the property cannot be improved and the nature of it must not be changed, which places restrictions on what the SMSF can undertake with respect to the property. If an SMSF is looking to buy vacant land, these restrictions will significantly hinder the SMSF’s ability to develop the land.
To maximise the value of any investment by an SMSF in property, it is crucial that trustees obtain advice to determine if this strategy is suitable.
How can Sharrock Pitman Legal can assist?
As Accredited Specialists in Property Law, our lawyers can advise property investors on options available to ensure that the investment is structured to deliver long-term financial benefits to an SMSF holding.
If you are considering purchasing real estate as a financial asset and would like advice purchasing property in Australia or setting up an SMSF, please do not hesitate to contact our Property Law team on 1300 205 506 or via email at firstname.lastname@example.org.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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Shubha Rao is a Senior Associate in the Property Law team at Sharrock Pitman Legal.