While an increasing number of members are using their self-managed super fund as a vehicle to invest in property, it remains to be an area of uncertainty. There are potential risks involved in using your SMSF to buy property, but if done correctly it can be beneficial and create long term advantages.
Benefits of buying property through your SMSF include being tax effective, beneficial to business owners, and it is an effective way to diversify your super investments. To successfully invest through your SMSF, there are a number of important things to consider.
Borrowing to buy property:
If you want to buy an investment property through your SMSF but haven’t accumulated enough super, your fund can borrow money to purchase a property, pay for repairs and maintenance, and capitalise interest. It cannot use borrowed funds to improve the property, such as renovations or extensions. For these activities, only the SMSFs own funds or additional contributions from the members can be used. Keeping records within your fund to identify whether borrowed money or internal funds were used is crucial.
Investing in property:
Property that is purchased through an SMSF cannot be lived in or rented by you, another trustee or any relation to a trustee. An SMSF also cannot purchase an existing residential investment property from a member.
A popular way to invest through an SMSF is to buy commercial property. This can be purchased by an SMSF from its members and is able to be used by the members and related parties. Many small business owners choose to use their SMSF to purchase business premises, paying rent directly to their fund. This can be preferable to paying rent to an alternate landlord. However, it is important to keep in mind that rent must be at market rate and be paid promptly and in full at each due date.
The investment must also satisfy the fundamental purpose of the SMSF, which is to provide retirement benefits for its members, known as the sole purpose test. To comply with the regulations, ensure that the purchase of your business premises benefits the retirement of the fund’s trustees.