One of the biggest differences between SMSFs and Regulated Industry Funds is an SMSF can invest directly in property. Learn more about the property investment rules.
The opportunity for your SMSF to purchase residential or commercial property can be a great way to diversify the SMSF’s investments and generate wealth for retirement. However, before making the decision to invest in residential or commercial property it is important to know the rules.
It must be noted that there are slightly different superannuation rules for residential property investments versus commercial property investments; firstly, though whether your SMSF purchases a residential property or a commercial property it must be purchased in the name of the SMSF, meaning your SMSF is the legal owner of the property, and the purchase must be paid from your SMSF’s cash balances.
· If your SMSF has individual trustees; ownership would be defined as the individual trustees as trustee for the SMSF, for example ‘Leo Potts and Evie Potts as trustee for the Potts Family Superannuation Fund’ or ‘Leo Potts and Evie Potts ATF Potts Family Superannuation Fund’. Please note all individual trustees should be included in the holding name and when an individual trustee is appointed or removed ownership of all fund assets needs to be amended to reflect the changes.
· If your SMSF has a corporate trustee; ownership would be defined as the corporate trustee as trustee for the SMSF, for example ‘Potts Super Pty Ltd as trustee for the Potts Family Superannuation Fund’ or ‘Potts Super Pty Ltd ATF Potts Family Superannuation Fund’.
In some States in Australia, you are unable to register an SMSF as the legal owner of real property and in this case fund ownership can be established through a caveat or a declaration of trust. A legal professional can help in such circumstances.
For residential property investment you need to know the following:
· Your SMSF’s residential property investment cannot be occupied, tenant or used by a fund member and/or a related party of a fund member. Please note that the property cannot be used, tenanted or occupied by a fund member and/or a related party of a fund member even for a nominal period (couple of days) or even if the use is paid for.
· Your SMSF’s residential property investment cannot be purchased from a fund member and/or a related party of a fund member.
For commercial property investment you need to know the following:
· Your SMSF’s commercial property investment can only be occupied, tenant or used by a fund member and/or a related party of a fund member when the property is considered Business Real Property; Business real property is an interest in real property where the land and buildings are wholly and exclusively used in the running of a business. Business real property must be leased to a fund member, a related party or a related entity/business on arm’s length terms, meaning the SMSF and tenant must be party to an executed lease agreement in which the terms, conditions and rental amount represent standard commercial practice/rates. Leasing business real property to a fund member, a related party or a related entity/business at a rental amount that is above or below standard commercial rates of rental return will result in a breach of the superannuation laws.
· Your SMSF’s commercial property investment can only be purchased from a fund member and/or a related party of a fund member when the property is considered Business Real Property; Business real property is an interest in real property where the land and buildings are wholly and exclusively used in the running of a business. The purchase must be on arm’s length terms, meaning the SMSF must determine and acquire the property at market value. Acquiring business real property from a fund member, a related party or a related entity/business at an amount that is above or below the property’s market value will result in a breach of the superannuation laws.
