Buying a residential or commercial property through your self-managed super fund can be a shrewd financial strategy. But it’s a complex process.
There are two main reasons for the complexity. First, there are many technical rules that apply to SMSFs. Second, these rules are accompanied by confusing jargon.
To make your life easier, we’re going to translate these confusing terms into plain English:
- Limited-recourse borrowing arrangement / LRBA
- Bare trust
- Contract of sale
- Stamp duty
- Sole purpose test
- Business real property
- Arm’s length
- Preservation age
- AFS licence / AFSL
Investing in real estate through your SMSF
Need a loan to finance your SMSF property purchase? If so, you’ll need to enter into a limited-recourse borrowing arrangement, or an LRBA. Standard home loans are full-recourse, so if you default on the loan, the lender could, theoretically, come after any of your assets to recoup its money. But with an LRBA, the only asset the lender can target is the asset connected to the loan – i.e. your property.
If you buy an SMSF property through an LRBA, the property can’t be registered to your SMSF. Instead, it needs to be held by a bare trust, a legal entity that owns the property on behalf of your SMSF.
When you buy the property, you will have to sign a contract of sale, which sets out the terms and conditions. You will also have to pay stamp duty, a property-transfer tax charged by the state government. This process can be handled by an expert SMSF conveyancer, a professional who specialises in property transfers.
Any property you purchase through an SMSF must meet the sole purpose test. This means there can be only one reason for buying the property – to provide retirement benefits.
There is one exception to the sole purpose test – if your SMSF buys a commercial property that is leased back to your business. A property that is used wholly and exclusively for business purposes, such as an office or a farm, is known as business real property.
In this instance, you have a conflict of interest, because you’re both the landlord (as your SMSF indirectly owns the property) and the tenant (as your business is renting it). So rent must be charged at market rates, which is known as an arm’s length transaction.
Remember, the rent your business pays goes into your retirement savings; and you can’t touch those savings until you reach preservation age, which is anywhere from 55 to 60:
- 55 if you were born before 1 July 1960
- 56 if you were born from 1 July 1960 – 30 June 1961
- 57 if you were born from 1 July 1961 – 30 June 1962
- 58 if you were born from 1 July 1962 – 30 June 1963
- 59 if you were born from 1 July 1963 – 30 June 1964
- 60 if you were born after 1 July 1964
Finally, if you get SMSF advice at any point during this process – whether from a financial planner or a property developer – that person must have an Australian financial services licence. This is known as an AFS licence or an AFSL.
Buying an SMSF property is complicated and time-consuming. So make sure you have an expert Victorian SMSF conveyancer on your side. Contact Sutton Laurence King Lawyers 03 9070 9810 or firstname.lastname@example.org to begin the process.