Buying property through your Self Managed Super Fund

There is still a lot of uncertainty around the future of our property market. Most forecasters are predicting a drop in property prices, but by just how much is still unknown. Whilst property only makes up around 13% of the total estimated value of assets held by Self Managed Super Funds (SMSF) ($748 million), it can be a viable asset to include in your portfolio.

So if you have a Self Managed Super Fund and have been considering investing in property, here’s what you need to know:

Property Rules – Residential Property

To buy a property through your SMSF, the property must meet the following:

• Not be acquired from a related party of a member
• Not be lived in by a fund member or any fund members’ related parties
• Not be rented by a fund member or any fund members’ related parties
• Meet the ‘sole purpose test’ of solely providing retirement benefits to fund members.

The object of the sole purpose test is to ensure that the SMSF is used for the sole purpose of providing benefits to members upon their retirement or their dependants in the case of the member’s death before retirement.

Property Rules – Commercial Property

Commercial property is generally a more favourable option with investors, than residential property. It’s important to note that the same restrictions apply to commercial property, as they do for residential, such as the sole purpose test.

It’s becoming a more popular option for SME’s to purchase commercial property through a SMSF and lease it back to themselves by paying rent to the SMSF. If you’re choosing to do this, you must ensure all investments are managed on a strictly commercial basis. You must also adhere to the following conditions:

• The terms of the lease must be commercially competitive and/or reflect market value. This means you can’t lease the property for considerably less than it’s worth to yourself to save yourself money
• You’re required to get regular valuations on the property to ensure the rent you’re paying is the appropriate market value
• You must pay your rent on time, in full, every time. You can’t pay a day or two late because you had a less than successful week, just like in any other rental agreement.

Costs associated with SMSF Property

As with any property sale, there are fees and charges involved. It’s important to know what these fees are and remember that they will reduce your Super balance.

• Upfront fees
• Legal fees
• Advice fees
• Stamp duty
• Ongoing property management fees
• Bank fees

Borrowing to invest through your SMSF

Borrowing to purchase a property through your Super involves some very strict borrowing conditions. The loan to value ratio (LVR) is also much higher for a SMSF than for residential property, so you’ll need a deposit of around 25 to 30 per cent. This is because lenders see it more as a risk; they want to protect you from losing your super, and make sure you buy the right property. Some lenders may also require your savings to be five percent of the value of the property.

Here are some other key factors to consider:

• Higher costs – SMSF property loans tend to be more costly than other property loans.
• Cash flow – Loan repayments must come from your SMSF. Your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
• Hard to cancel – If your SMSF property loan documents and contract aren’t set up correctly, you can’t unwind the arrangement. You may have to sell the property, potentially causing substantial losses to the SMSF.
• Possible tax losses – You can’t offset tax losses from the property against your taxable income outside the fund.
• No alterations to the property – You can’t make alterations that change the character of the property until you pay off the SMSF property loan.

So what’s the final consensus?

• Property investment through your SMSF can be a complicated process, but if you already have a SMSF you’re likely aware of possible complications of such an intricate financial structure.

• SMSF property investment can be a very viable strategy for some whether it’s for diversification of assets of for commercial use.

• In some cases, the negatives outweigh the benefits when it comes to residential SMSF investment, due to liquidity and cash flow.

• Whatever avenue you take, the most important thing is to remain compliant, which often requires a team of professionals. It can pay to repeatedly consult with accountants and qualified financial advisers throughout your buying process.

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Whilst we at Greenhalgh Pickard are not financial advisors, nor are we property forecasters, we can provide Taxation guidance for your Self Managed Super Fund. If residential property investment is of interest to you, please contact Greenhalgh Pickard today.