Navigating Property Acquisition through Self-Managed Superannuation Funds

Taxation & Revenue

minutes reading time

DATE PUBLISHED: November 10, 2023

key takeaways

  • SMSF Property Investment involves complex strategic decisions.
  • The diversification method in SMSF Property Investment should align with the SMSF's financial situation, investment objectives, and compliance capabilities.
  • Obtaining advice is essential when considering SMSF Property Investment to ensure compliance with superannuation laws.

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:

  • No borrowings or charging of assets by the unit trust.
  • No investments in shares or units of other unit trusts.
  • Inability to loan funds to other entities, except for loan deposits with authorised deposit-taking institutions.
  • Unable to conduct a business.
  • Limitation on entering leases with related parties, unless the leased property qualifies as business real property.


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:

  1. 1
    Loan-to-Value Ratio (LVR) is 70% or less
  2. 2
    A formal written loan agreement is in place.
  3. 3
    Security is provided over the property.
  4. 4
    Regular monthly principal and interest repayments are made.
  5. 5
    The interest rate is the prescribed amount.
  6. 6
    The loan term is set at 15 years.

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:

  • Prohibition on acquiring assets from related parties;
  • Sole purpose test;
  • Prohibition on loaning money to members or their relatives;
  • Trustee’s Investment Strategy;
  • Arm’s length dealing requirements;
  • Non-arm’s length income.

conclusion

Acquiring property within a SMSF offers an opportunity for Australians to diversify their retirement savings and potentially benefit from property appreciation. However, the choice of method should align with the SMSF's financial situation, investment objectives, and compliance capabilities.

Obtaining advice is essential when considering property acquisition through a SMSF to ensure compliance with ever-evolving superannuation laws and to make informed decisions that support the client’s retirement goals.

If you require further information on the ever-evolving superannuation laws, please reach out to us today.

Chris Davis on (07) 3014 6530 or cdavis@mcw.com.au, or Kimberley Barnes on (07) 3231 0637 or kbarnes@mcw.com.au

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