Property investing within your self-managed super fund is a highly regulated affair and playing by the rules is essential if you are to avoid the hazards and downsides of the property game.
Here are some facts & questions which will help you better understand property investing within your self managed super fund. You will soon discover that property investing in your SMSF is not so complicated and does have its financial rewards.
Can I live in the property I buy with my SMSF?
No, when it comes to purchasing residential property inside your SMSF, one of the tightest rulings by the ATO (Australian Taxation Office) is that the investment must be kept at “arm’s length”
This means you can’t use your SMSF to purchase the home you live in, nor can you use it to purchase an investment for your family or lease it to anyone other than an unrelated third party. Yes, this unfortunately means that investing in your dream holiday home is also not possible.
This rule is put in place to restrict you from directly benefiting from the asset until retirement.
What about commercial property? Can I invest my super in a business premises?
Yes you can. The ATO treats commercial property different to residential investments and allows you to indirectly benefit from the use of the property via your own business. For example, your super fund could potentially purchase the premises your business currently leases, allowing you to pay rent directly to your SMSF.
Many business owners have seen real benefit in obtaining a commercial property under this system as it essentially allows them to become their own long-term tenants.
What if I don’t have enough super to invest in property safely?
There is an option to lend funds to your SMSF for an outside source (E.g personal equity), in a similar way a bank lends money to its customers. The SMSF would then repay the loan back to you over an agreed time and at an agreed rate.
Alternatively, because an SMSF allows up to four members to act as trustees to the fund, you can effectively pool your assets with other parties to raise the monies required.
If my property increases in value, can I use the additional equity to buy more property?
The government has restricted the ability of SMSF’s to redraw on any additional equity gain that their investments may experience. This is one of the biggest considerations when it comes to investing in property as your equity gains are effectively locked inside the fund and can’t be leveraged in the same way as investments outside the fund.
Can I renovate to increase the properties value?
Yes, you can repair or renovate the property to improve it or add value. However, the difference lies in how the building works are financed and it is important to understand the difference between ‘repair’ and ‘improve’ if you are to avoid any liability.
Maintaining – means work done to prevent defects, damage or deterioration of an asset, or in anticipation of future defects, damage or deterioration, provided that the work merely ensures the continued functioning of the asset in its present state. This includes general wear and tear of the property. For this work, the SMSF can use its own funds or it can borrow the required funds to get the work done.
In comparison to repair an asset, which is if the state or function of the asset is significantly altered for the better, through significant alterations, or the addition of further features to the asset. This might include adding a pool, building extension or upgrading the kitchen or bathroom. In these cases, the SMSF can ONLY use existing funds (not borrowed or founded from external sources to finance the improvements).
Can I develop the property I have purchased with my SMSF?
Every case is different and needs to be evaluated under its own circumstances; however a overall general ruling states that the SMSF property must remain the same asset. This basically means that you cannot buy a vacant block of land then put a house on it, you can’t convert a house to a restaurant, and you can’t pull a house down and build three townhouses in its place..
As you can see, it’s essential to understand the terms and conditions when purchasing a property with your SMSF as there are restrictions and if breached does have some costly consequences. Also important to keep yourself up to date with this legislation as it is often changing to accommodate this growing investment strategy.
It’s encouraged to obtain some advice just to avoid any misinterpretations.