What purchasers should be aware of when purchasing property in their self-managed super fund

By Charlotte Tully, at Hillhouse Legal Partners
| 5 min. read

Key takeaways

  • Using a self-managed super fund (SMSF) to purchase property can be an attractive, tax effective, option but buyers need to be fully across all rules and requirements
  • It is important that SMSF purchasers consider the risks and tax considerations associated with purchasing property in a self-managed superannuation fund
  • Prior to entering into a contract to purchase in an SMSF, buyers should speak to a qualified financial advisor or SMSF expert to obtain advice relevant to their circumstances

Purchasing an investment property in a self-managed superannuation fund (SMSF) is an attractive, tax effective, option for many. However, it is important prospective purchasers are aware of the rules and requirements (legal or otherwise) for purchasing in their SMSF.

There are special rules which apply only to regulated superannuation funds. These rules include:

  1. In order for your SMSF to be eligible for the tax concessions normally available to super funds, the fund will need to meet the sole purpose test. This means that the fund must be maintained for a core purpose. These core purposes essentially relate to providing retirement or death benefits for, or in relation to, SMSF members. For example, for providing retirement benefits to member’s dependents if a member dies before retirement. Section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA) prohibits trustees from maintaining an SMSF for purposes other than for the provision of benefits specified in subsection 62(1).
  2. The property cannot be purchased from, lived in or rented by a fund member or any related parties of a fund member. The ATO has strict guidelines around this point in addition to other SMSF compliance laws.
  3. SMSF’s can be used to purchase residential property and commercial investment property. For commercial property, there is a degree of flexibility in how you can use your SMSF to fund the purchase. Provided the commercial property is used primarily to carry out your business activities, the SMSF can be used to invest in the business premises, subject to specific rules. Importantly, the SMSF is not permitted to invest in your actual business. Effectively, your business would become the lessee of the space that the fund owns. The rent paid (which must be at market rate) for the business premises would go directly into the fund i.e. the business is paying rent, but it is benefiting your super fund.
  4. If you intend to use your SMSF to borrow money to fund the purchase of a property SMSF regulations allow for this, however there are specific rules that manage the process.

For an SMSF to be used to obtain a home loan, it must abide by strict borrowing conditions. A limited recourse borrowing arrangement (LRBA) is used by the fund to take out the home loan. This arrangement limits the recourse of the lender by requiring a fund to establish a separate property trust and trustee on behalf of the fund, outside the structure. The income and expenses of the property go through the fund’s bank account and the super fund must meet all repayments. If the fund fails repayments, the lender only has the property held in the separate trust as recourse, meaning the lender cannot access any remaining assets of the super fund.

It is important that SMSF purchasers consider the risks associated with purchasing in a self-managed superannuation fund.

For example, loans taken out for an SMSF can be more costly than other property loans. In addition to this, as mentioned above, repayments for the loan must come from the fund (as well as the deposit funds required to purchase the property). It is paramount that the fund has sufficient cash flow to sustain repayments and other expenses for the property. Arrangements for a self-managed superannuation fund are not able to be unwound. In the event there is an issue with your loan documents and contract, you may be forced to sell the property which, consequently, can cause losses to the fund.

There are also important tax considerations. Namely, you will be unable to offset tax losses from the SMSF property with taxable income outside your fund. Additionally, if the investment is in a commercial property, and your earnings are $75,000 or more, you will be required to register for GST. You should also consider the Capital Gains Tax (CGT) implications. For example, if you choose to sell the property, any applicable CGT will be payable.

Prior to entering into a contract to purchase in an SMSF, you should speak to a qualified financial advisor or SMSF expert in order to obtain advice relevant to your particular circumstances.

If you require any assistance documenting a superfund purchase or wish to discuss, please do not hesitate to contact us. We are here to help.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.