Purchasing property in a Self Managed Superannuation Fund

Purchasing property in a Self Managed Superannuation Fund

Notwithstanding lingering uncertainty about the future of limited recourse loan arrangements for self managed superannuation funds (SMSF), acquisition of real property remains a popular investment strategy for SMSF trustees.  When considering purchasing real property, SMSF trustees need to be aware of the strict rules that apply, particularly when borrowing money or when purchasing property from entities related to the fund. Given the potentially catastrophic outcomes if a SMSF is declared non-complying, trustees should ensure they obtain proper legal and financial advice before committing to a purchase.

What are some of the issues?

Any investment by an SMSF must comply with the Superannuation Industry (Supervision) Act 1993 (Cth) (the Act) and associated rules, and the SMSF’s rules as set out in its deed.  The primary rule is known as the ‘sole purpose test’, which states that an SMSF must be maintained for the sole purpose of providing retirement benefits to its members (or, if a member dies before retirement, their dependants).  There are a number of things that flow from the sole purpose tests, including related party and in-house acquisition rules which generally mean :

– property must not be purchased from an SMSF member or related party of an SMSF member; and

– property must not be used by an SMSF member or  related party of an SMSF member.

There is an important exception to these rules relating to what is defined as ‘business real property’.

What is the ‘business real property’ exception?

“Business real property” generally refers to land and buildings used wholly and exclusively in one or more businesses.  The exception means that, provided strict conditions are met, an SMSF can both purchase business real property from a member or related party, and lease business real property it owns to a member or related party.  An acquisition from a member or related party must be made on an ‘arms length basis’ – in other words, on a commercial basis as if there were no relationship between the parties.  The SMSF must pay market value for the property, and the price should be supported by an independent valuation.  The same principles apply to property leased to members (or related parties).  There should be a formal,arm’s length commercial lease agreement in place, again where possible supported by independent valuation.

What about residential property?

An SMSF can still purchase residential property, provided it is not acquired from a member (or related party) and it is not leased to, or used by a member (or related party).  In other words, the family home or holiday home cannot be purchased in an SMSF!

What about borrowing?

As outlined previously, there is still some uncertainty about the future of limited recourse borrowing arrangements.  The current rules do allow SMSFs to borrow to purchase property, again provided that very strict conditions are met.

What should interested SMSF Trustees do?

Purchasing real property through a self managed superannuation fund is a complex process, particularly when a related party and/or borrowing is involved.  SMSF trustees should engage the assistance of suitably qualified and experienced financial and legal advisors to assist them through this process.

The Ballantyne Law Group is experienced in all aspects of property acquisition, sale, borrowing and leasing by SMSFs, and are well placed to assist trustees in this complex area.

Contact us on (07) 5606 7332 to discuss this matter with one of our team today.

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