SMSF’s Investing in Property

SMSF’s Investing in Property

Editor:  Property investment has become increasingly popular over recent years.  In particular setting up a Self Managed Superannuation Fund (SMSF) to purchase investment properties seems to be the flavour of the season!

If you are interested in purchasing an investment property or setting up an SMSF please discuss with us prior to entering into any contracts as it can be costly if you get it wrong!

Borrowing

Changes to superannuation laws allow SMSF’s to borrow in limited circumstances.  When an SMSF borrows money to invest in property it needs to do so via limited recourse borrowing arrangements (LRBA).  These borrowings need to be made on commercial terms to avoid adverse income tax consequences.

Borrowing in an SMSF is complex and requires the setup of other entities to satisfy borrowing conditions.  These arrangements should always be discussed with taxation and legal professionals.

Investment Strategy

Trustees are required to invest in accordance with the investment strategy of the fund, including giving regard to liquidity.

When deciding whether to invest in property, trustees should consider if it meets the diversification and liquidity requirements of their fund.  For example, when members retire and start receiving pensions, there needs to be sufficient money in the fund to meet the minimum pension payment requirements.

Related Party Transactions

In the case of an investment property being leased to a related party, trustees need to ensure compliance with superannuation laws, such as:

• in-house asset rules
• sole purpose test
• arm’s length requirements

Use of Property in Retirement

When an SMSF starts to pay a pension, all property investments must continue to be maintained in accordance with superannuation laws, in particular the sole purpose test and in-house asset rules.  For example, members are not able to occupy or lease residential property on retirement without the asset first being sold or transferred to member(s) as a benefit payment.

Trustees need to keep in mind that the transfer of any asset from an SMSF to a member must also be permitted under the governing rules of the fund and that a capital gains tax (CGT) event will occur, with possible taxation implications for the fund.

Insurance

Trustees need to consider insurance to cover unforseen events which can impact on the SMSF’s property investment.

• General Insurance – trustees should ensure they have adequate insurance to cover property repair or replacement costs in the event that the property is damaged.

• Third-party Liability Insurance – trustees should be aware that as a property owner, they can be sued, which may put the fund’s assets at risk.

• Death or Total and Permanent Disability (TPD) Insurance – trustees should consider the benefit of policy proceeds to assist in meeting ongoing obligations, particularly where the property is business real property used in a family business.

Source:  Australian Taxation Office