In a retail, corporate or industry super fund, you may be able to invest in property indirectly. Many of these funds allow investments in listed property trusts or as part of a large diversified portfolio that makes investments in certain types of property such as infrastructure or commercial property. Whilst these indirect property investments can also be accessed in an SMSF, a SMSF is essential to purchase direct property in superannuation.
In an SMSF, investments can also be made directly in either residential or commercial property using your super. As trustee of your SMSF (or a director of the corporate trustee of the SMSF), you have greater control over which property (or properties) your fund is invested in. You choose which property to buy, manage the rent and any expenses and determine when it is time to sell.
You can use your SMSF to buy residential or commercial property. However, any property held by your SMSF must meet the sole purpose test of providing retirement benefits to fund members, or a benefit to their dependants if a member dies before retirement.
Residential property: there is nothing to prevent an SMSF from investing in residential property as long as the property is not acquired from a related party of a member.
However, the family home cannot be owned by your super fund. Nor can you rent a residential property owned by your SMSF to a fund member, or to their related parties.
However, you can buy an investment property of your choice that you rent out to tenants who are not fund members or their relatives.
Commercial property: you can also hold commercial property, including your own business premises, in your SMSF.
While the property still needs to meet the sole purpose test, when dealing with commercial property, an SMSF can generally purchase the property and lease it back to a member or a related party of the fund – including the member’s business.
An arm’s length sale price and lease arrangement will be particularly important when acquiring and / or leasing property to a member or related party of the fund.
Before buying property within an SMSF, it is important to understand superannuation law and other relevant law in this area. Importantly, the SMSF’s trust deed must enable property to be purchased and property must form part of your fund’s investment strategy. There are also restrictions on who you can buy the property from and who it can be rented to.
Legislative changes have made it possible to borrow via a ‘limited recourse’ loan.
The Property is bought within the Self Managed Super Fund though a ‘bare trust’ that holds the property title until all loan repayments are made. At this point, the asset is transferred (at no tax charge) to the full ownership of the Self Managed Super fund.
The arrangement is self-contained and the lender has no call on any other Self Managed Superannuation Funds or personal assets. The arrangement therefore will have little impact on your ability to borrow personally.
By borrowing to invest into a single property, it means that the SMSF has to have enough income in rent, and contributions, to cover the loan repayments for the property. The borrowing also creates ‘Gearing’ whereby your capital is stretched to buy a larger asset and your equity would be affected disproportionately by value changes that could be either positive or negative.
Whilst such a strategy enables some individuals to build a larger portfolio of properties, it is an area where advice is needed. Aside from the construction of a Self Managed Super Fund, the Bare Trust (and associated Bare Trust Company) are specialist structures that need to be created. The lending is of a specialist type of borrowing and the completion of the deal needs the co-ordination of numerous legal and financial professionals.
Paris Financial Services would look initially at your goals and make an assessment as to whether Property in Superannuation has a role to play in your finances. If so, we are also able to advise on the merits or otherwise of borrowing. We are able to explain the structure of the arrangements and bring experienced specialists in the Property Acquisition, Mortgage, Legal and Accounting arena to work through the process.