Buying a Property in a SMSF:

The advantage of having an SMSF is based on four main elements — investment choice and control, flexibility, taxation benefits and costs. One feature that may have great appeal and utility is the ability to purchase real estate using your SMSF. A SMSF, like all types of superannuation funds, often have a portfolio which may include direct investment in real estate. There are a number of ways in which a property can be acquired and owned by an SMSF.  If you are interested in purchasing property using your SMSF, detailed legal and financial advice may be of great assistance to ensure that you take advantage of all the tax benefits and maximize your return. Taxation law is full of complexities and detail, therefore, an experienced Taxation Lawyer may be able to consider your SMSF property acquisition enquiries and optimise your returns.

The major reason for establishing an SMSF is the control the trustees and members have over investment decisions. Many trustees of SMSFs prefer to invest directly by purchasing shares, interest bearing securities and real estate as they consider their decisions can produce better returns than professional superannuation fund managers. You may decide to purchase real estate for a number of reasons such as, because you believe the property market will experience growth; your want to take advantage of CGT benefits; it is a form of forced savings and you can choose to reside in the property or use it purely for investment. There is no restriction to the proportion of the fund which can be invested in property. Therefore it is possible for a fund to hold up to 100% of its investments in property, although most superannuation funds hold less than this level.

A superannuation fund may purchase all of a property. The Superannuation Law recognises two types of property that can be owned by the superannuation fund — business real property and any other property. In these cases it must be ensured that the investment is consistent with the fund’s investment strategy and asset allocation. Any acquisition of the property must also be made on an arm’s length basis. To establish that the acquisition is on an arm’s length basis the trustees should ensure all transactions are recorded and all relevant documents are retained by the fund. A consultation with an experienced Tax and Superannuation Lawyer can ensure that property purchased using a SMSF is suitable for all your needs, goals and expectations and is compliant with superannuation and taxation law.

Furthermore, you can purchase the property with others. There are two methods of owning property with others — tenants-in-common and joint tenancy. A tenant-in-common arrangement is where the owners of the property have rights to a distinct proportion of the property none of which can be physically identified. Joint tenancy is where each owner of the property does not own a clearly identified proportion of the property. On death, the joint tenant’s interest in the property ceases and ownership passes to the remaining owners. A superannuation fund owns property with others usually as a tenant in common and not as a joint tenant. Advice from a Superannuation and Taxation Lawyer can ensure that any jointly owned property protects your interests and share of the property.

You can also purchase business real property in your SMSF. Business real property is real estate which is used wholly and exclusively for business purposes by anyone. For example, if a property is used solely to operate one or more businesses then it will meet the definition of business real estate.  If part of the property is used partly or wholly for residential or private purposes then it will not be regarded as business real estate in most cases. There are two exceptions to the basic rule. This is where the property is used for primary production purposes, such as a farm or part of the property is used for residential purposes to form an integral part of the business. In the case of a farm, an area of up to two hectares can be used for residential purposes and the farm will continue to be treated as business real property.  An example of a residence forming an integral part of the business would be a motel where the manager is usually required to live on the premises. Professional and holistic legal advice from a Superannuation and Taxation Lawyer coupled with sound financial advice may be hugely beneficial to ensure your SMSF property acquisition optimizes your tax profile and investment return.

However, it is important to note that Superannuation Law generally does not permit a superannuation fund to borrow to purchase property. It is not possible to place a charge, such as a mortgage, over any property once ownership has been transferred to the fund. When a mortgage is placed over a property, a financial institution or other party places the mortgage over the title to the property and not the portion of the property held by each owner.

If you would like further information or wish to discuss your SMSF matter with us please do not hesitate to contact us by telephone on (02) 9233 4048 or by email to info@navado.com.au.

This webpage (and any material or wording appearing on this webpage) is provided for general information purposes only and does not constitute any Legal Advice. It does not take into account your objectives, your instructions or all of the relevant facts and/or circumstances. Navado accepts no responsibility to any person who relies on the information provided on this website. We further refer you to our Disclaimer.