According to the most recent taxation office SMSF statistics, the largest asset allocation within self-managed superannuation funds (SMSFs) by far is listed shares at approximately 31% of the whole. This is followed by cash and term deposits at 26%. The combined value of residential and non-residential real property runs third though, at approximately 15% of the total. Investing in property through a SMSF is a strategy that sparks interest in many investors.
Nevertheless, investing in property within superannuation is not as straightforward as investing outside the superannuation environment. Here is a quick and very broad rundown of what you can and can’t do. Please note, however, that this information is not advice. It’s very important to seek professional financial advice on your SMSF investment matters.
SMSF Property Investment:
SMSFs are able to buy both residential and commercial property – however it’s important to note that all investments need to be in the best interests of fund members and in accordance with the law. As such any property investment should have an income stream and realistic prospects for capital growth. Overall, an SMSF investment strategy needs to take into account the personal circumstances of all the fund members, including their age and risk tolerance and needs to consider:
- diversification (investing in a range of assets and asset classes)
- the liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses)
- the fund’s ability to pay benefits (when members retire) and other costs it incurs
- the members’ needs and circumstances (for example, their age and retirement needs).
Interestingly, ATO statistics show that a great dollar value of SMSF assets is held in real non-residential property as opposed to residential property. This may well reflect the fact that business real property is an exception to the in-house asset and related party acquisition SMSF rules. Furthermore the ATO advises that, if business real property is used in a primary production business such as a farm, it can still meet the test of being used wholly and exclusively in a business even if it contains a dwelling that is used for private or domestic purposes.
This is a potential benefit for business owners.
What you must justify:
When it comes to making any form of investment through a SMSF, the Australian taxation office (ATO) provides the following guidance:
- Investments must be purchased on an ‘arm’s length’ basis and must be maintained on a strict commercial basis.
- The investment must meet the sole purpose test of providing retirement benefits to fund members.
In terms of property, this means that the purchase and sale price – as well as the rental income – must reflect a true market rate of return. It also means that you usually cannot buy the property from – or sell the property to – someone associated with any of the Fund’s members.
It also means that neither you nor anyone associated with you can receive any personal benefit of holding the asset. The ATO advises that one of the most common breaches of the sole purpose test is in assets that provide a pre-retirement benefit to a member or associate. Some examples of a breach would be using a SMSF property as a personal holiday house, or renting a SMSF property to a family member.
What you cannot buy:
Your own home. The ATO advises that while you can buy a residential investment property through your SMSF, the Fund cannot own your own home. Nor can your fund own a residential property being rented by a family member or other related party – unless the value of that property is less than five percent of the total value of assets within your SMSF.
Overall you cannot buy any form of investment that does not satisfy the sole purpose test of providing retirement benefits to the members.
What you should do:
Seek professional advice! There can be fantastic benefits associated with investing in property through a SMSF – but ensure that you understand what the rules are before you make the leap.