As a Self-managed Super Fund (SMSF) trustee you might, at some stage, want to invest in property as part of your fund’s investment strategy.
Before you do, you should fully consider the risks associated with property investment. Holding a “real property investment” can affect other aspects of your fund, such as benefit payments, and any investment must comply with superannuation laws.
Here are 6 issues to consider before your SMSF makes a property investment:
1. Your SMSF’s investment strategy
Is an investment in property in line with the investment strategy of your SMSF?
Watch out for the diversification and liquidity requirements of your fund. And remember, your SMSF must have enough funds available to pay benefits when members retire, and other costs it might incur.
An SMSF can only borrow in limited circumstances.
Borrowing for your SMSF to invest in property needs to be done under a limited recourse borrowing arrangement (LRBA). Borrowings must be made on commercial terms to avoid negative income tax consequences.
3. Related party transactions
If the property is to be leased to a related party, make sure of compliance with superannuation laws, such as:
4. Use of property in retirement
When your SMSF starts to pay a pension, all property investments must stay compliant with superannuation laws; including the sole purpose test and in-house asset rules.
For example, members are not allowed to occupy or lease residential property on retirement without the property first being sold or transferred to the member(s) as a benefit payment.
Keep in mind that the transfer of any asset from your SMSF to a member must be allowed under the governing rules of your SMSF. Also, the sale may spark capital gains tax (CGT) implications for the fund.
5. Offshore investments
Issues associated with property investment for your SMSF can be heightened when the investment is located offshore. That doesn’t mean it can’t be done, but thoroughly assess issues such as liquidity.
Seriously consider insurance for your SMSF to cover unforeseen events. Cover can include:
- General insurance – to cover property repair or replacement costs if the property is damaged
- Third-party liability insurance – as a property owner your SMSF can be sued, putting the fund’s assets at risk
- Death or total and permanent disability insurance – consider the benefit of policy proceeds to help meet ongoing obligations, especially if the property is “business real property” used in a family business.
There is no specific guidance from the Australian Taxation Office (ATO) – other than the existing rules of superannuation laws – as to what your SMSF can invest in regarding real property. That’s because it isn’t the ATO’s role to give investment advice.
The ATO urges trustees to seek professional advice regarding the investment strategy of their SMSF. It’s important to remember that you, as the trustee of your SMSF, are ultimately responsible for managing the fund. Therefore, it’s your responsibility to seek advice and take on appropriate research and scrutiny when making investment decisions.
Need to check whether investment in property is right for your SMSF? A Synectic adviser can help navigate the issues, so you can invest with confidence.
(This post was originally posted on 2 June 2015, updated 27 Nov 2018)