Property investment in Australia can bring you huge financial benefits from rental income, capital growth and possible tax deductions to the fact that you have a physical asset. But in order to invest in property you need to have the funds to acquire it in the first place. And your self-managed super fund (SMSF) might just be the answer.

How to Use Your SMSF to Buy Property

We’re often asked if and how someone can use their SMSF to buy property. The answer to the first part of that question is yes – you can use your SMSF to purchase an investment property, either residential or commercial.

However, the Australian Tax Office (ATO) has strict rules that apply to properties purchased using SMSF funds. Here’s how you can use your SMSF to buy property, and the rules, costs and risks involved.

What is an SMSF?

An SMSF, like most other superannuation funds, is simply a way of saving for your retirement. Unlike other super funds, however, when you are part of an SMSF you are (usually) both a member and a trustee.

Acting as the trustee of the fund means that you’re also responsible for managing the fund. That means that you determine the investments, including property investments, the insurance and are responsible for ensuring that it complies with all the super and tax laws. It also means you’re responsible for managing the investments – including property investments.

SMSF and investing

One of the investments that you may choose to make through your SMSF is in property. However, there are strict rules in place when it comes to SMSF investing. One of the most important is that you’re always ensuring that you’re making any investments in the ‘best financial interests of fund members’. The test for this will be a ‘reasonableness one’ (i.e., is it reasonable to have thought an investment was in the best interests of the fund members?).

You also must make sure that the SMSF’s investments are completely separate from your own and other fund members’ personal and business affairs. In practice this means that SMSF investments must be made at commercial ‘arm’s length’. This is to safeguard the fund’s retirement benefit to the fund members (and ensure that no one is taking advantage of the fund’s greater investment power!).

So when it comes time to invest in a property through your SMSF, you must make sure the purchase price, sale price and rental income of the new asset must reflect the true market value and rate of return. It also pays to have an investment strategy. The strategy will help to ensure that the purchase of investment property is consistent with the strategy and risk profile of your SMSF.

How to invest in property via your SMSF

There are some fundamental rules when it comes to buying property through your SMSF:

• Property can only be for investment purposes. It can never be a residence for you, any other fund member or any ‘related party’ of a fund member, either now or in the future.
• It must be purchased for the ‘sole purpose’ of providing retirement benefits to SMSF members.
• With strict exceptions, an investment property must not be purchased from a ‘related party’ of a fund member. This is because no one associated with your SMSF should receive a “present day benefit” from its investments.
• A commercial property purchased by your SMSF can be leased to a fund member or to a ‘related party’ for their business. But the commercial property must be leased at market rate and be used solely for their business purposes.

Can a SMSF borrow to purchase a property?

As an SMSF trustee you can apply for a loan from a third-party lender to purchase an investment property, but very strict borrowing conditions apply. You will likely need to utilise a limited recourse borrowing arrangement (LRBA) where you hold the investment property in a trust separate from the SMSF.

Risks

Borrowing is a complex area of SMSF. So it’s important that you seek advice from a licensed financial adviser to explain the risks. These risks can vary from higher costs compared to other property loans to potential compliance costs. 

If you intend to use your SMSF to purchase property, it’s a good idea to talk first with a Lending Loop mortgage broker and ensure you have financial advice from an accountant or financial advisor, tailored to your specific circumstances.

Get in Touch!

Understanding how to use an SMSF to buy an investment property is a complex area of finance. It’s highly recommended you seek expert advice to make sure you understand the risks and retirement benefits of this type of lending – and which lender may be best for your situation. 

This is something our team of Lending Loop experts can help you with!

Get in touch with us today.