Self managed super funds (SMSF) are becoming an increasingly popular way for Australians to build their wealth towards retirement. The ability to manage and maintain your own retirement savings is an attractive prospect for many people. There is also a growing number of people who are putting their money towards an investment property. Fortunately, these two methods of generating wealth can come together in harmony thanks to recent legislative changes.
If you don’t have quite enough in the super fund to purchase outright, you can also take out a SMSF loan to make up the balance. There are some things to look out for when buying a home in this way, so keep these points in mind at the outset.
You can’t purchase property for development or resale
The investment you make with your SMSF loan will be judged by what’s known as the sole purpose test. This stipulates that the investment can only be used for a single reason – to generate savings for the SMSF, not as a profit-making venture. For this reason, the fund can’t buy a property for redevelopment purposes. You will also need to be careful with the extent of renovations, as this can be interpreted as a profit-making exercise.
The property mustn’t be owned by friends or family
This stipulation prevents the fund from investing in property that was previously owned, or bought from, an associate of the fund. The scope of this is very wide and isn’t just limited to immediate family. It could be anyone, from distant friends to work colleagues. In the same way, the property cannot be sold to or leased by anyone remotely connected to a member.
This is a conflict of interest and could break the sole purpose test, which sets down that no one related to or associated with the fund should get any pre-retirement benefit from the fund.
These points are incredibly important to bare in mind when using self managed super fun loans to buy property, as any non-compliance will be heavily penalised.