Property investing is a great way to grow your superannuation fund. However, one must be careful when investing in SMSF property because there are strict rules around how much you can borrow and the type of property that can be purchased.
The following is an overview of what you need to know about this investment.
A fund purchases residential property that a related party must be occupied or rented on an arm’s length basis.
This means that the property must be occupied for business reasons and not just for investment purposes. For example, if you own a cafe and live above it, this would be viewed as using your assets to produce business income – and it is therefore not allowed under SMSF regulations. So if you rent out the unit in this situation, you need to ensure that there is some actual demand for tenancy.
The property must not be renovated to increase its value and leased at a higher rent.
The rental income cannot be higher than market rates for similar units. If you cannot meet these requirements, you may be able to use a different type of investment instead.
The ATO views this as using the fund’s assets to produce business or rental income, and the fund will pay tax on the rental income earned.
If you are doing this, it is essential to know that the ATO has the power to audit your fund and can force it to pay tax if they find that you are not complying with their rules.
Yes, SMSFs may borrow up to 80% of the value of instalments on an instalment warrant as margin finance.
The fund must be able to pay back the loan within five years and at a commercial interest rate, which means it must not be a special rate such as an advertised interest rate or set by your lender’s policy.
No, if you have borrowed money from your SMSF to purchase a property, you cannot live in that property even if you are a member of the fund.
There are several reasons why you may not be able to live in a property owned by your SMSF.
- You must rent the SMSF property out. If you try to buy an investment property and live in it, this will not work as you have breached the rules around self-managed superannuation funds (SMSFs). You cannot use the property as security for a loan. This means that if something happened to your business or career, such as losing your job, you would struggle to repay any loans against this asset because of its unique status.
An SMSF can lease commercial property from a member or related party of the SMSF; however, except for real business property (that is, land used wholly and exclusively in a business), any other asset leased will be seen as an in-house asset and must not represent more than 5% total assets of the fund.
The lease must be at arm’s length. The rent payments are also calculated on market rates for similar premises in that area.
Yes, however, as with any lease between an SMSF and a related party, it must be done on an arm’s length basis (that is, at market rates), and appropriate documentation must be kept regarding such transactions.
The trustee of the SMSF can enter into leases to carry out their duties as trustee and for use by other members of their family who are not involved in managing the fund. This would include subleasing from another member of your family who has leased from you or subleasing from another unrelated person who has leased from someone else.
No, you cannot use assets purchased with borrowed monies as security against any personal loan.
There is no way to use assets purchased with borrowed monies as security against any personal loan.
Property investing can work well for SMSFs, but you must be careful how you set it up.
When looking at property investment, the first thing to consider is what you can and cannot do with your SMSF.
- You can buy properties with the fund but not sell them.
- You can borrow money against the value of a property to buy another one, but only if the loan is secured against that other property’s value.
- You must have a professional financial planner or accountant who understands how SMSF rules work, and they will help you invest wisely in both residential and commercial real estate.
So, there you have it. You need all the information about investing in property through an SMSF. It’s certainly not easy, and it might seem like a lot of work at first glance. But if you take your time, get all the correct information and look out for any potential red flags before going ahead with your purchase, it could be one of the best decisions you ever made!