The Complexities of Managing a Self Managed Super Fund including Buying Property

There are many matters to consider when considering purchasing residential or commercial property in a Self Managed Super Fund.

What it is: A Self Managed Super fund (SMSF) is just that – a superfund that is essentially run by yourself. Having an SMSF means having control of how your super is being invested and it has become a popular method of saving for retirement.

The SMSF is regulated by the Australia Tax Office.

A SMSF can have up to 4 members who are known as the Trustees.

The Trustees must be over 18 years of age, not a disqualified person and not under legal disabilities and are equally responsible for decisions of the SMSF.

A Trustee must act honestly in all matters concerning the SMSF, act in the best interest of all members, have an understanding and meet the responsibilities and obligations and ensure the SMSF complies with the laws that are applied to the SMSF.

The Trustee should:

• Have financial experience to make investment decisions;
• Keep records for audit purposes;
• Organise insurance for the trustees;
• Follow an investment plan that doesn’t exceed the risk tolerance and will meet the retirement needs of the trustees.

Benefits of a SMSF

Generally, a SMSF is set up for the following reasons:

• Control and flexibility and can be tailored to suit the specific needs and circumstances of the SMSF
• Tax benefits as the SMSF you can easily put in place a tax plan that benefits the SMSF
• Members can see and control how their monies are invested

Disadvantages

Time consuming and complex. Trustees are responsible for ensuring their fund complies with the legislation and rules and should be not taken lightly. It would be advisable to engage a professional to ensure requirements are met.

The cost of running a SMSF are higher when assets held within the SMSF are low in value. Generally speaking, you should have at least $250,000.00 worth of assets to make running a SMSF worthwhile.

Purchasing Residential Property in a SMSF

You do have the option of purchasing a residential property the name of a SMSF, however, there are restrictions associated with doing this.

A trustee or anyone related to the trustee, cannot live in the property, nor can a trustee or anyone related to the trustee rent the property.

The SMSF cannot purchase the property from a trustee or anyone related to the trustee.

It must be proven by meeting the ‘sole purpose test” that the purchase is solely for the purpose of providing retirement fund benefits to the members of the SMSF.

Purchasing Commercial Property in a SMSF

When it comes to SMSF property purchases, investing in commercial property is generally more popular than residential. Whilst the restriction of proving the “sole purpose test” as mentioned above still applies, the property can be leased to a trustee or related party to the trustee by paying rent to the SMSF, however, it is a requirement that the property is managed on a strictly commercial basis and that true market value is reflected when it comes to the lease terms. Regular Valuations of the property will need to be ordered by the trustee to ensure that the lessee (tenant) is paying rent on the current market value.

The Australian Tax Office regularly audit SMSF’s so it is very important that the above requirements are met and that the rent is paid on time.

Obtaining a loan to buy property through a SMSF

It is possible to get a loan to buy a property though a SMSF but it is highly complex and the number of financial institutions offering loans to SMSF have decreased in recent times, due to the complexity and small margin profit schemes.

Borrowing criteria for an SMSF is generally much stricter than a normal property loan that you might take out as an individual. The loan also comes with higher costs, which needs to be factored in when working out if the investment is worthwhile.

All SMSF loans must be taken out through a Limited Recourse Borrowing Arrangement  (LRBA) and to ‘limit the recourse’ of the lender, a separate property trust and trustee is established to hold the property on behalf of the super fund, outside the actual SMSF structure. The income and expenses of the property go through the super fund’s bank account. The super fund must meet all loan repayments. If the super fund fails to do this, the lender only has the property held in the separate trust as recourse, and cannot access any remaining assets of the super fund.

You can also use borrowed funds for the purpose of paying for general maintenance or repairs of the SMSF property, however, you cannot use borrowed funds to improve the property. This means that you cannot use borrowed funds to erect a pergola or build a granny flat as this is making improvements to the property.

ABOUT AMY  DUGUID:

Amy brings 20 years of conveyancing experience to Coutts and is dedicated to guiding her clients throughout the selling and buying process. She is highly efficient and brings a wealth of knowledge specializing in residential sales and purchases, family transfers, transfers pursuant to Court Orders and retirement village contracts as well as working on all other areas of conveyancing, including purchases of property in Self Managed Super Funds.