Many people,who are looking to boost their retirement benefits through high investment returns, wonder whether it’s possible to transfer or buy a property within their SMSF. The simple answer is yes, it is possible; however there are strict rules and regulations that must be adhered to.
A property (as long as it is classified as a “business real property”) that is owned by a member outside their SMSF may be transferred into their SMSF. There may be some considerable tax benefits gained by doing this, but it is important that the trustees seek financial advice prior to the purchase of any property in the name of their Fund.
There are some very specific types of property that an SMSF is allowed to invest in: some can be transferred into the SMSF, whereas others must be purchased by the SMSF. The two different types of property are known as Business Real Property and Residential Real Property.
Business Real Property
Business real property in relation to an entity is defined as meaning:
where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of a beneficiary of a trust estate.
Two basic conditions must therefore be satisfied before an SMSF or any other entity related to or dealing within an SMSF can be said to hold business real property:
An SMSF can purchase business real property from any person; however if the property is purchased from a member (or a related party) of the SMSF it must be at arm’s length. Once the business real property is an asset of the Fund, it is also permissible for it to be leased back to a Fund member (or related party), on condition that the rent is calculated at market value and is paid directly into the Fund.
Another option for purchasing business real property is to buy it jointly, by the members as individuals and the SMSF, and then over time the SMSF can gradually purchase the property from the members.
Residential Real Property
Residential real property is not the residential version of business real property, although it sounds like it should be. Unlike business real property, an SMSF cannot buy residential real property at arm’s length from a Fund member (or a related party), nor can it rent the property at arm’s length to a Fund member (or a related party). However, an SMSF can purchase residential real property outright or jointly by the members as individuals and the SMSF as tenants in common.
Types of property than can be purchased by an SMSF
Farms: A farm can be purchased by an SMSF. If it is purchased from a Fund member (or a related party) the farm must meet the definition of business real property. However, the domestic area/dwelling cannot exceed 2 hectares and the predominant use of the property must be for business use and not for private or domestic purposes.
Holiday Houses: A holiday house can be purchased by an SMSF, but it cannot be purchased from a Fund member (or a related party), because it cannot meet the definition of a business real property. Similarly it cannot be leased to a Fund member (or a related party) at reduced or market rates.
Businesses: An SMSF cannot invest in a business. It can only invest in the real property that the business is running off. The exception to this rule is business rights, for example patents or business licences. An SMSF is allowed to invest in these rights and derive income from them in the form of royalties or lease income.
Boat moorings: A boat mooring can be owned by a SMSF, but again, only if the mooring is rented to a business i.e. a boat hire or fishing business. The boat mooring will act like a business property in this case. A member is also able to lease the mooring if using it for commercial purposes.
Transferring property from a related party into an SMSF
There are two ways an SMSF can acquire a property from a Fund member (or a related party). It can either buy the property or have it transferred in-specie.
Whichever way the transfer takes place, there will most likely be CGT consequences to be considered, but there will also be tax benefits that might offset some or all of the CGT liabilities.
A property transfer from a Fund member (or a related party) can also work in combination with a limited recourse borrowing and revenue from the property can be used to repay a loan. For more information on this strategy please download our free eBook “How To Buy Property Within Your Self-Managed Superannuation Fund”.
What to do next?
If you are considering acquiring property within your SMSF you should carefully research all the rules and regulations that are applicable. Seek specific advice to ensure you are fully informed about the legal requirements and consider each of these questions before making any decision:
It is also important that the Trustees fully comprehend the illiquid nature of direct property as an asset. This lack of liquidity may impact the Trustees’ ability to meet ongoing financial obligations as they arise.
If you need any form of assistance or advice regarding your SMSF, make an obligation-free appointment with one of our experienced advisors or download our free eBook “How To Buy Property Within Your Self-Managed Super Fund”.
To schedule a FREE consultation complete our ‘Make an Enquiry’ form, then click the submit button – today!