Key rules to obey when purchasing property in super

You can only buy property through your SMSF if you comply with the superannuation laws and regulations.

There are four key rules to obey:

• The purchase must pass the ‘sole purpose’ test
• The property must not be bought from a related party of any of the SMSF members (unless business real property)
• None of the SMSF members or their relatives can live in the property
• The property can’t be rented by any of the SMSF members or their relatives

If your SMSF purchases business real property (such as commercial premises or an industrial warehouse), it can be leased to a fund member or related party for their business. However, it must be leased at the market rate and all dealings, including the terms of the lease, be on an arm’s length basis.

If you are considering purchasing property in your SMSF, you should assess whether the investment is consistent with the investment strategy and risk profile of the fund.
It is also important to know you can also borrow to purchase the property in your SMSF under very strict borrowing conditions, under what is called a limited recourse borrowing arrangement.

So when looking to acquire and hold property in your SMSF, remember these key rules. It’s very important to get the purchase right and make sure you are complying with the super legislation, as there are high entry and exit costs, such as stamp duty, legal fees & real estate agent fees if you get it wrong and have to remove the property from your Fund.

Scenario

Jenna 62, and her partner Alex, 64, are members and trustees of their own SMSF. Their daughter, Georgia, 27 would love to get into the property market but doesn’t have the savings or credit history to acquire her first home on her own.

To help her get into the market, they purchase a residential property in their super fund which they will let her live in rent-free and will transfer to her at a later date.

The Issues

The rules around holding property in your SMSF prevent relatives of members from living or using residential property held by the Fund.
In addition, Jenna and Alex have not purchased the property in accordance with the sole purpose test, as they are doing this with the primary intent of helping their child get into the property market.

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