Of course! But like anything with SMSF’s, it is a heavily regulated area and so there are certain do’s and don’ts to follow.
Firstly, the overarching rule with SMSF’s is that they are a vehicle to provide for your retirement. This is known as the ‘sole purpose test’. So, provided your investment aligns with your Fund’s investment strategy, then no problem.
If you’re considering purchasing a residential property, the key rules to follow include:
• The Fund cannot acquire the property from a related party;
• You cannot live in the property yourself; and
• You or a party related to you cannot rent the property.
The rules relating to commercial property are slightly different and allow property to be acquired from and leased to related parties. This, however, can only be performed under the following conditions:
• The property is Business Real Property (“BRP”). That is, property that is used wholly and exclusively used in one or more businesses; and
• The property is acquired at market value.
These rules therefore allow business owners to use their SMSF to acquire their business premises and then proceed to pay market value rent for the use of the property in accordance with arms-length documented lease. It’s important to note, however, that some private or non-business use of the property may cause this test to be failed and so it is important to consult your advisor.
The main advantage of acquiring property within a SMSF is, firstly, that any realised capital gains achieved on the property can be concessionally taxed at the rate of 10% in the future, and in certain circumstances these gains can even be tax free. However, whilst there may be concessionally taxed / tax free capital gains on offer it is always important to consider the transactional costs of transfer.
Can I borrow to acquire property?
An SMSF may enter into a finance arrangement known as a Limited Recourse Borrowing Arrangement (“LRBA”). A LRBA is different to a normal finance arrangement as the security provided to the lender in respect of the loan is limited to the asset that the borrowing relates to. That is, the lender does not have access to other assets of the Fund.
Not all assets can be acquired under a LRBA. The asset must be what is known as a ‘single acquirable asset’. In respect of property, this is generally limited to a single title, however, in some cases this may constitute more than one title provided the property cannot be dealt with separately.
One of the key advantages with using a LRBA to acquire property is that the rental return as well as any concessional contributions can be used to pay down the loan into Super. This is particularly so if you have enough cash flow to maximise your contributions.
Unfortunately though, LRBA’s are not a vehicle for property developers. The Superannuation Industry legislation / regulations do not allow borrowed funds to be used for the development of property as this would constitute a replacement asset. That is, the character or function of the asset cannot be altered by more than a minor amount. As a result, you must also tread carefully with respect to improvements to property. Whether an improvement changes the character of an asset is a question of fact, and so it is best to contact us for advice.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.