Investing in Property Through an SMSF

What deposit is required when purchasing property through an SMSF?

• Typically, a deposit of at least 20-30% of the property’s purchase price is required when buying property through an SMSF. This is due to the Limited Recourse Borrowing Arrangement (LRBA) structure, where lenders generally demand a higher deposit compared to standard property loans. Additionally, you’ll need to account for other costs such as stamp duty, legal fees, and setup costs, which will also need to be covered by the SMSF’s funds.

What are the rules for borrowing within an SMSF?

• Borrowing within an SMSF is allowed under specific conditions known as a Limited Recourse Borrowing Arrangement (LRBA). This means that if the loan defaults, the lender’s recourse is limited to the property purchased with the loan, and they cannot access other SMSF assets. The loan must be used to purchase a single asset (e.g., a residential or commercial property) or a collection of identical assets that have the same market value.

Can I buy any type of property with my SMSF?

• Your SMSF can purchase residential or commercial properties, but there are restrictions. The property must meet the sole purpose test, meaning it must be purchased for the sole purpose of providing retirement benefits to fund members. You cannot buy a property from a related party of the fund (with some exceptions, such as business real property) or use the property for personal purposes.

Can I combine my superannuation with my spouse, family members or others to set up an SMSF?

• Yes, you can combine your superannuation with a spouse, family members, or up to three other individuals to create a Self-Managed Super Fund (SMSF). This allows you to pool your superannuation savings, potentially giving you more purchasing power to invest in property. All members of the SMSF become trustees (or directors if a corporate trustee is used) and share the responsibility of managing the fund and complying with superannuation laws. It’s important to have a clear strategy and agreement among all members regarding the investment and management of the property.

Can my SMSF purchase a property with other investors?

• Yes, your SMSF can purchase a property jointly with other investors, including unrelated parties or other SMSFs. This arrangement is known as “tenants in common.” However, the SMSF must adhere to the same strict rules, and all joint investments must be structured correctly to comply with superannuation laws.

What happens to the property if the SMSF needs to sell it?

• If your SMSF decides to sell the property, the proceeds from the sale must remain within the SMSF. These funds can then be reinvested into other assets within the SMSF or used to pay out retirement benefits once fund members meet the conditions for release. Any capital gains from the sale may be subject to capital gains tax, depending on the SMSF’s phase (accumulation or pension).

What happens to the property in the SMSF when I retire?

• When you retire and start drawing a pension from your SMSF, the property can remain within the SMSF, generating rental income that is tax-free. Alternatively, the property can be sold, and the proceeds can be used to fund your retirement income. In some cases, it may be possible to transfer the property out of the SMSF and into your name as part of your pension benefits, though this would be subject to tax implications.