Things to consider when using an SMSF loan to buy property

Self-managed super funds (SMSFs) continue to increase in popularity as a retirement option, with Australian Taxation Office (ATO) figures showing they currently comprise 99.5 per cent of the country’s super funds.

The ATO data also revealed that the number of SMSFs climbed 27 per cent over the five-year period to 2014-15. As such, there are approximately 557,000 SMSFs, with collective assets of $590 billion in the country.

Real estate remains one of the most sought-after SMSF investments, and ATO statistics showed residential and commercial properties make up roughly 15 per cent of fund assets.

Many people use SMSF loans to buy investment properties, as this approach provides various benefits. However, there are a number of restrictions on purchasing real estate through an SMSF that members should take into account before proceeding.

Let’s examine some of the rules surrounding SMSF investment property purchases and how they affect members.

The sole purpose test

Properties purchased through an SMSF must meet this test, which requires any investment decisions made on behalf of the fund to have the sole purpose of creating retirement benefits for its members. In other words, no one else should directly or indirectly receive financial rewards when choosing how to invest money in the SMSF. Trustees found in breach of this test are likely to lose concessional tax benefits and could also face civil or even criminal charges. 

Living and renting arrangements

SMSF members or any parties related to them are forbidden from residing in or renting a residential investment property bought through a fund. The list of ‘related parties’ is fairly extensive and includes members’ relatives, business partners and spouses, and children of business partners, among others. A full list is available on the ATO’s website.

Acquisition of the property

Residential real estate cannot be bought from a related party of a member; however, the purchase of a business real property is allowed if the asset is bought at market value. Business real property is typically considered to be buildings or land used wholly and exclusively for commercial purposes. According to the ATO, assets can meet the business real property definition even if residential dwellings are part of the site, such as on farms.

Would you like to know more about SMSF loans for investment properties? Redrock can provide you with the information you need to make an informed decision. Contact us today to speak to a member of our team.