WHAT PROPERTY CAN I BUY IN A SMSF
These are some answers to common SMSF property related questions.
1: Can I sell an existing investment property or my home I own, into my SMSF?
A: NO, You cannot sell an existing investment property or a principal place of residence to your SMSF as this is a breach of the following sections of the super laws ( SIS Act) (Section 62, sole purpose test, 66 acquisitions of assets prohibition, 71 in house assets and section 109 arm length basis). This is a serious contravention as you are a related party to your SMSF section 10(1) SIS Act
- Rent an investment property to your self
- Or rent it to a family member or friend at under or over market rental rates
However under limited circumstances section 66 of the sis act legislation allows assets such as business real property and listed investments ( shares and managed funds) that are individually owned by a member of the SMSF( Refferred to as a related party ) to sell this asset to their super fund at market value
2: Can I renovate or develop a property held within my SMSF?
A: You can renovate an existing SMSF property under certain conditions.
The following provisions apply to renovating SMSF property.
- You cannot borrow to complete your renovations on the property in question but you can use
cash in your SMSF or contribute additional funds to complete a renovation provided
that no debt is outstanding on the property you are renovating or improving
- Your renovations cannot create a separate title or function
* In the ATO’s view the following renovations and developments are examples of breaches which create a new asset or a ‘replacement asset’
Money other than borrowings used to improve an SMSF Asset
134. Subparagraph 67A(1)(a)(i) only excludes borrowings being used to fund improvements. Therefore, money from other sources could be used to improve (or repair or maintain) a single acquirable asset.
135. However, any improvements must not result in the acquirable asset becoming a different asset.
The above is an extract from SMSFR 2011/D1
Examples of renovations that are not allowed are the following:
- Converting a house to units,
- Developing a site that creates a sub division
- Converting a residential property into a medical practice or a therapy services business
- Building a house on a vacant plot of land already owned by an SMSF* – seek advice
3: Can I purchase an off the plan property in a SMSF?
A: Purchasing off the plan is allowed. There is however a process that needs to be adhered to.
Typically, the SMSF pays a deposit for the property in order to secure it. When the property is completed, a loan application is submitted ( typically 90 days before property is completed) to the lender after which contracts are exchanged when the lending facility is in place and the property is fully completed. It’s important to note, that all furniture packages cannot be purchased as part of a lending arrangement. However, units with a separate title car park will meet the definition of a ‘single acquirable asset’ as in most cases the property could not be sold without the car park, subject to state laws.
4: Can I purchase a house and land package in my SMSF?
If a house and land package were purchased as a single transaction and provided that it is settled with two payments ( Deposit from SMSF and the rest via a bank loan) or drawdown’s then this would be allowed in a SMSF. However, if an SMSF member considers building a property on existing land owned by an SMSF, this would not be allowed as the character of the asset has changed.
5: Can I add a granny flat to an existing house?
Yes you can. In the ATO commissioners view a granny flat does not result in substantial change and the granny flat cannot be sold as a separate asset. SMSFR 2012/1 Section 35 Table 2 ( 9)
6: Can I purchase my existing or a new business property with my SMSF
You can purchase an existing or new business property in your SMSF. There are stamp duty concessions for owners who own the property in their personal name. Typically, stamp duty is payable and their might be capital gains considerations. The purchase must be at market value, with a legal lease put in place and rent charged at market rates, neither below market nor above market rates. The property will need to be valued every 3 years and in some cases more frequently depending on your lending arrangements.
7.Can I run a business or purchase a business and operate this in my SMSF?
The answer is generally NO. This type of arrangement is problematic due to super law ( SIS Act) breaches of the
- Sole purpose test
- Arms length rules
- In house assets and related party transactions
There are however exceptions where a business interest is purchased via a another trust or entity or where a franchise business is purchased to generate retirement benefits for the fund. These strategies are very complicated and sound financial advice should be sort before attempting them.
CHECK THE FOLLOWING
Does the investment provide a future benefit and not a present day benefit to me?
Is this a hobby business?
Could the income be taxed as non-arm’s length income?
8: Can I purchase a holiday home as an investment property in my SMSF?
An SMSF can purchase a property to be rented out to others as a holiday home at commercial rates. If you or your family decides to stay in the property for any period of time, it might be permissible provided that its on commercial terms for a short period and where the property is externally managed. If a holiday house is used more frequently,it will no longer meet the sole purpose test, and the Australian Taxation Office may classify the total asset as an in-house asset, of which you allowed only 5% of the fund’s total value, to invest in. This will result in the SMSF losing its concessional tax treatment ( 15%) and being taxed at 45% on the asset and any income.
Warning: This information is general in nature and you will need to seek specialist financial and legal advice for your circumstances.