SMSF property investment: the 7 most common questions, answered - part one

According to KPMG in their Super Insights 2019 research, more than 30% of the Australian superannuation market is made up from SMSFs, with the number set to increase from 596,225 to 690,742 by 2024 (+16%). More than 1 million Australians have an SMSF today.

Residential property investment makes up a significant proportion of assets, with many SMSFs leveraging recent strong capital growth and seeing positive portfolio returns. In fact, ATO data from 2018 indicates property investment makes up more than 15% across all asset classes in SMSF investing.

There are limitations and rules imposed on investing in property through SMSFs.

Here we answer the first 3 of the 7 most commonly asked questions to ensure you understand the complexities and comply with superannuation legislation.

1. Are there any differences in obtaining property finance for an SMSF property purchase?

There are very strict borrowing conditions when it comes to obtaining finance to purchase a property through your SMSF. This is called a Limited Recourse Borrowing Arrangement and involves an SMSF trustee taking out a loan from a third party lender.

When you undertake a limited recourse borrowing arrangement, it can only be used for purchasing a single asset such as a commercial or residential property.

Quite often banks will lend less money to an SMSF than they might lend to individual buyers because of the perceived extra risk that they carry. The non-recourse nature of the loan means that if an SMSF defaults then the lender can only repossess or sell the property in question, but not any of the SMSF’s other assets.

Most financial institutions will not lend to an SMSF unless they have a balance of at least $200,000. Loan repayments can only be made from the SMSF, not an individual, so the SMSF always needs to have funds available to make mortgage repayments.

The borrowing arrangements for an SMSF can be complicated, so it’s recommended that you seek professional advice from a financial advisor to determine if this is the right investment for your SMSF.

2. What types of property can be purchased in an SMSF?

The property must meet what is called the Sole Purpose Test where it solely provides retirement benefits to members of the fund.

Residential properties cannot be purchased from a related party of a fund member or lived in by a fund member or a related party. It also can’t be rented by a fund member or a related party of a fund member.

Commercial properties, on the other hand, can be purchased by an SMSF from a member and can be used by fund members and related parties as long as it is done on an arm’s length basis.

For example, a small business owner can use their SMSF to purchase business premises. They can then rent the premises and pay the rental income to the SMSF so long as they pay rent at the full market rate and pay on time.

3. Can you transfer a property into an SMSF?

While member contributions to an SMSF are usually made in cash, members of an SMSF may be able to make a contribution of an asset to their fund instead, called an ‘in specie’ contribution.

There are only certain assets that can be transferred as an in specie contribution, among them are business or commercial properties.

Commercial properties titles can be transferred from an individual to the SMSF by executing a contract of sale and lodging the appropriate transfer documents with the relevant state or territory authority.

SMSFs are regulated by the Australian Taxation Office, and non-compliance with legislation can attract a range of hefty civil and criminal penalties.

Get the rest of your SMSF property investment questions answered in part two with questions four through seven.

Contact

DPN is an award-winning, professionally certified Property and Financial Services Enterprise. We provide access to specialist SMSF finance solutions and investment grade properties. Find out how property can help your SMSF work harder. Call us today on 1300 723 318 or email hello@dpn.com.au.