Navigating Property Acquisition through Self-Managed Superannuation Funds

Exploring Your Options

Investing in property through a Self-Managed Superannuation Fund (SMSF) has become an increasingly popular strategy for Australians looking to diversify their retirement portfolios. Our role in property transactions is to assist trustees with navigating the compliance associated with the proposed acquisition and structure. In this article, we will explore at a high level the different options available for acquiring property through a SMSF and various considerations associated with each approach.

Purchase Outright within the Super Fund

The most straightforward method of acquiring property within an SMSF is to purchase it outright using the funds available within the superannuation account. This option is available for SMSFs that have accumulated sufficient funds to cover the property's full purchase price.

Limited Recourse Borrowing Arrangement

A Limited Recourse Borrowing Arrangement (LRBA) allows an SMSF to borrow funds to acquire land. However, these funds cannot be used for construction or development on that property. LRBAs can be a practical solution for SMSFs with limited liquid assets but it is crucial to note that LRBAs come with strict rules and regulations.

Invest via a Related Unit Trust

Another option is to invest in property through a unit trust. SMSFs can invest in related unit trusts provided they adhere to the guidelines set by the Superannuation Industry (Supervision) Regulations 1994 (SISR), specifically regulations 13.22C and 13.22D of the SISR. According to these regulations SMSFs are allowed to invest in unit trusts where members or associates have a substantial interest.

To ensure compliance, the fund must strictly adhere to the requirements outlined in SISR 13.22C and 13.22D. These requirements include:

If any breach of the regulations occurs, the arrangement must be wound up. A harsh penalty for sometimes inadvertent breaches by trustees.

Purchase Outside the Fund and In-Specie Transfer

If the property is held by a related entity and it qualifies as business real property, members may look to contribute the whole (or portions) of the property to the Fund as in-specie non-concessional contributions and utilising their full bring-forward amounts. This would usually occur when a couple of members have their full bring forward amounts available and they contribute all or part of a property valued up to $660,000 to their SMSF. This requires careful drafting in the contract or transfer documents to ensure it is clearly shown as a contribution and not an acquisition for less than market value to ensure we do not create non-arm’s length income issues.

Combination Strategy: Optimising Contributions and Borrowing for SMSF Property Investment

Assuming that an SMSF does not have sufficient funds to acquire a property outright and the contributions is not sufficient to acquire the whole of the property, Fund trustees may look to a combined approach.

Contributions

As a starting point, a member may look to utilise their annual contribution caps, plus any catch up concessional contributions and bring forward non-concessional contributions, to either contribute cash (to buy part of the property outright) or contribute parts of the property itself to the SMSF.

Borrowing

With the remaining part of the property that cannot be purchased outright or contributed, the SMSF may look to borrow to purchase the remaining amount. The fund can borrow any remaining funds to acquire the property (including stamp duty). There is no requirement with respect to who the lender to the fund can be, provided it is on an arm’s length basis between the fund and the lender. For related party lenders, parties are encouraged to utilise the terms for arm’s length terms published by the Australian Taxation Office in PCG 2016/5, which is:

After the expiration of any bring forward period, the members can look to pay down the debt by making more non-concessional contributions to the Fund, which may take the form of debt forgiveness by the related party lender (noting that that there are tax implications for the SMSF and lender for doing so).

Small Business CGT Concessions

Where the property being acquired or contributed is from an entity that carries on a business, the small business CGT concessions should be considered, specifically the 15 year exemption and retirement exemption.

Other considerations

When considering property acquisition (or contributions) by an SMSF, it is vital that the client seek advice from a legal superannuation expert to navigate the strict regulations and compliance with any of the above approaches, in particular: