Investing in property through an SMSF is becoming more and more popular for Australians looking to grow their retirement savings.
But before you start on this journey, you need to understand the legal and compliance requirements.
In this post we will go through the key points of SMSF property investing, what to watch out for when buying a property, selling an SMSF property, penalties for non compliance and whether you can you live in one when you retire.
When buying a property through your SMSF you need to work with SMSF compliance experts to ensure your fund stays compliant.
Here are some key points to consider:
Sole Purpose Test: The property must meet the sole purpose test, meaning it must be for the benefit of fund members in retirement. This is the cornerstone of SMSF compliance and must be complied with at all times. Any investment that provides a benefit to members or related parties today will breach this test.
Residential Property Restrictions: Residential property cannot be bought from or rented to a fund member or related party. This rule is in place to stop members getting an immediate benefit from their SMSF investments. But there are some exceptions for business real property (BRP) which we will get to later.
Commercial Property and Related Parties: Commercial property used for business purposes can be bought from and rented to related parties at market value. This is known as BRP and allows SMSFs to invest in property used by a member’s business. But there are strict rules that apply including a qualified independent valuation and an arm’s length lease agreement.
Investment Strategy: The property investment must align with the SMSF’s documented investment strategy. The strategy should consider the fund’s investment objectives, risk tolerance, liquidity requirements and diversification. It’s important to review and update the investment strategy regularly to ensure it’s still relevant to the fund’s circumstances.
Not complying with these SMSF property rules can result in penalties and disqualification as a trustee, so it’s important to get professional advice from an SMSF accountant or compliance specialist before making any property investment decisions.
Yes you can sell an SMSF property. But there are rules and considerations:
Market Value: The sale must be at market value even if selling to a related party. This ensures the SMSF gets a fair price for the asset and prevents any potential conflicts of interest. A qualified independent valuation may be required to prove the sale price is at market value.
Capital Gains Tax (CGT): CGT implications must be considered when selling an SMSF property. If the property was acquired after 19 September 1985 and sold for a profit the SMSF will be liable for CGT.
But CGT may not apply if the property is solely supporting pension payments to members. This is known as the “segregated pension asset” exemption and can provide significant tax savings for SMSFs in pension phase.
Transfer and Stamp Duty: Transfer or stamp duty may apply depending on your state or territory. These costs can be significant and need to be factored into the sale decision. In some cases stamp duty concessions may be available for transfers between an SMSF and its members but specific conditions apply.
Liquidity and Diversification: Before selling an SMSF property consider the impact on the fund’s liquidity and diversification. Property is a relatively illiquid asset and selling may take time. And if the property is a significant portion of the fund’s total assets selling may impact the fund’s diversification and investment strategy.
Important Note:
Get professional advice from an SMSF accountant before selling an SMSF property to ensure compliance and minimize tax liabilities. They can guide you through the complex rules and regulations surrounding SMSF property sales and structure the transaction in the most tax effective way.
The ATO takes SMSF non-compliance seriously with penalties ranging from fines to freezing the fund’s assets. Some common contraventions include:
Breaching the Sole Purpose Test: As mentioned earlier the sole purpose test requires an SMSF to be maintained for the sole purpose of providing retirement benefits to its members. Breaching this test can result in significant penalties including the loss of the fund’s complying status and tax concessions.
Providing Loans or Financial Assistance to Members or Relatives: SMSFs are not allowed to provide loans or financial assistance to members or their relatives. This rule is designed to prevent members from accessing their superannuation savings before retirement. Breaches can result in administrative penalties and the fund losing its complying status.
Breaching the In-House Asset Rules: In-house assets are loans to, or investments in, related parties of the fund. SMSFs are limited to having no more than 5% of their total assets invested in in-house assets. Breaching this limit can result in administrative penalties and the fund being required to dispose of the excess assets.
Not Keeping Proper Records: SMSFs are required to keep comprehensive records of their transactions and financial position. Not keeping proper records can result in administrative penalties and make it difficult for the fund to demonstrate compliance with the relevant laws and regulations.
SMSF non-compliance can result in:
Administrative penalties up to $13,320 per contravention
To avoid these outcomes, you need to work with an SMSF auditor who will review the fund’s financial statements and compliance with the relevant laws and regulations and provide an independent opinion on the fund’s compliance status.
They can also identify potential issues before they become major problems and allow the trustee to take corrective action and avoid penalties.
You can’t live in an SMSF property during the accumulation phase but there are options to use the property personally upon retirement:
Both options have stamp duty and tax implications so you need to consult a professional. An SMSF accountant or financial advisor can help you weigh up the pros and cons of each option and determine which one is best for you.
We can also help you navigate the complex rules and regulations around SMSF property transfers and structure the transaction in the most tax effective way.
Investing in property through an SMSF can be a great way to build retirement wealth but you need to understand and comply with the legal and regulatory requirements.
From the sole purpose test and related party restrictions to CGT implications and transfer rules, there’s a lot to consider when buying, selling or transferring an SMSF property.
Work with SMSF accounting and compliance experts and you can navigate the SMSF property investment maze without penalties and keep your fund compliant. We can provide guidance and support throughout the process from developing an investment strategy to structuring transactions and ongoing compliance.
If you’re thinking of an SMSF property investment start by looking into our SMSF setup services to get your investment journey off to the right start.
With the right advice and support an SMSF property investment can be a great addition to your retirement savings portfolio and provide long term growth and income.
SMSF specialists – Making SMSF set up, accounting an auditing easy
