Naomi Smith, Senior Tax Manager in Nexia Canberra’s Tax Consulting Division, discusses what kinds of properties SMSFs can invest in. She writes: “Placing property investments within SMSFs will continue to be popular – given the low 15 per cent tax rate within SMSFs – however, SMSF trustees must remember to adhere to the complex rules within the Superannuation Industry (Supervision) Act 1993.”
Naomi will present on the topic Property Investments in Self-Managed Superannuation Funds at the Property, Trusts and Insolvency Update on Thursday, 28 February.
Investing in property through an SMSF has been popular in recent years, particularly because SMSF’s can raise external finance to fund a direct property purchase, through a Limited Recourse Borrowing Arrangement (LRBA). In addition, the reduced tax rates in SMSFs make investing in property through an SMSF more attractive than investing personally.
An SMSF can purchase residential and commercial property on the condition that the SMSF satisfies the following conditions:
- The sole purpose of funding the persons retirement or qualifying death benefits under section under section 62 of the Superannuation Industry (Supervision) Act 1993 (‘the SIS Act’);
- The property is not acquired from an associate (unless the property is business real property) under section 66 of the SIS Act (see the definition of associate below); and
- The property is not an in-house asset as defined in section 71 of the SIS Act. Note the lengthy definition of inhouse asset includes where a property is leased to a member of the fund or their associate, except where that property is business real property (see below).
These conditions will be discussed further below in relation to residential and commercial property.
Residential investment property
Purchasing a residential investment property through an SMSF is subject to certain restrictions.
Under section 62 of the SIS Act, an SMSF must be maintained for the sole purpose of providing retirement benefits to its members. This means that:
- A residential investment property purchased through an SMSF cannot be lived in by its fund members or by any associates or related parties of the fund members.
- A residential investment property purchased through an SMSF also cannot be rented to its fund members or to any associates or related parties of the fund members. This would also be a breach of the in-house asset rule.
Under subsection 66(1) of the SIS Act, a residential investment property owned by a member or their associates cannot be transferred into their SMSF. This means that:
- An SMSF cannot be used to purchase a residential investment property from its members or their associate even if the transaction has been conducted under arm’s length conditions.
- A fund member cannot transfer its residential property into the SMSF as a superannuation contribution.
The definition of associate is in section 70B of the SIS Act:
- A relative of the member;
- The other members of the superannuation fund;
- All of the trustees in the case of single member fund;
- All of the directors in the case of a single member fund with a corporate trustee;
- Partners within a partnership and their spouse and children;
- The trustee of a trust where a member controls a trust; and
- A company that is sufficiently influenced by, or in which a majority voting interest is held by a member of the SMSF.
The definition of relative under section 10 of the SIS Act includes any of the following people in relation to an individual:
- a parent;
- lineal descendant;
- adopted child of the individual or of his/her spouse; and
- the spouse of any of the aforementioned persons.
Other Commercial Property
As with residential property, the commercial property cannot be used by the fund members or their associates, even if a market value rent is paid, until the property is business real property as discussed below.
Commercial property that is not business real property cannot be transferred to an SMSF where the property is owned by the member or a related party.
However, much commercial property will be business real property as discussed below.
Business real property
An SMSF can purchase business real property. The definition of business real property under subsection 66(5) of the SIS Act includes:
- any freehold or leasehold interest of an SMSF in real property, or
- any interest of an SMSF in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer
Generally, acquiring an asset from members of an SMSF and their associates is prohibited under subsection 66(1) of the SIS Act. However, an SMSF is permitted to acquire business real property from its members and their related parties. This is allowed under paragraph 66(2)(b) of the SIS Act provided that the acquisition price is at market value. This is an exception from the normal rule where members are not usually permitted to sell their assets to their SMSF.
Apart from the business real property acquisition, according to paragraph 6 of the ATO Self-Managed Superannuation Funds Ruling 2009/1 (‘SMSFR 2009/1’), business real property can be leased by SMSF trustee to members and their associates if that the business real property is not an in-house asset under section 71 of the SIS Act. This means business owners can use their SMSF to purchase business premises and then pay rent direct to the SMSF. The rent paid must be at the market rate and must be paid promptly and in full at each due date with no discount applied. The investment must also satisfy the overarching function of the SMSF under section 62 which is to provide retirement benefits for its members.
Placing property investments within SMSFs will continue to be popular given the low 15% tax rate within SMSFs. However, SMSF trustees must remember to adhere to the complex rules within the SIS Act, as explained above.
Naomi Smith is a Senior Tax Manager in Nexia Canberra’s Tax Consulting Division. Naomi has 18 years of diverse tax and accounting experience gained at mid-tier firms in Australia and the UK. Naomi has advised many high-profile wealthy clients, entrepreneurs and internationally mobile clients. Naomi has a talent for solving complex tax issues whilst meeting the client’s wider needs. Naomi is an Australian and UK tax adviser and she advises UK expatriates on the complexities of the Australian and UK tax systems. Naomi is a specialist superannuation law adviser and assists the firm’s superannuation fund clients in their compliance with that law, the development of pension strategies and estate planning. Naomi also specializes in tax advice on foreign superannuation policies including UK pensions, Canadian RRSPs and US IRAs. Contact Naomi at [email protected] or connect via LinkedIn.