In NSW, a self-managed superannuation fund (SMSF) offers a strategic method of property investment. However, the process is governed by a complex framework of legislation and regulatory oversight, which makes it essential to seek professional advice before proceeding with any property investment through your SMSF.

Using an SMSF to invest in property

You can purchase an investment property through your SMSF which can be funded directly by cash from the SMSF. If an SMSF does not have sufficient funds to purchase the property outright, a limited recourse borrowing arrangement (LRBA) can be used to borrow the necessary funds.

Under LRBA, a separate property trust and trustee are set up to hold the property on behalf of the SMSF independently from the SMSF itself. This structure restricts the lender’s claim solely to the property within the trust, preventing access to any other assets held by the SMSF.

Investing in property through an SMSF also offers various tax advantages:

• Rental income is taxed at a concessional rate of 15%.
• Capital gains on properties held for over 12 months receive a one-third discount.
• Assets supporting a retirement phase income stream may be eligible for tax exemptions on investment earnings

Compliance requirements

To ensure compliance with regulatory standards and eligibility for tax advantages, your SMSF property investment must satisfy the following essential criteria:

1. Sole Purpose Test

The primary purpose of the investment must be to provide retirement benefits of the SMSF (known as the sole purpose test).

2. Arm’s Length Rule

Any investments by an SMSF must be made and maintained on an arm’s length basis, including at the time of acquisition, sale and borrowing funds to acquire investment property. This means all transactions must be conducted at fair market value, as if the parties involved were unrelated and acting in their own interests. This rule aims to prevent special relationships, undue influence, or preferential treatment from affecting transactions.

3. Restrictions on residential property

A property purchased through a SMSF cannot be used or lived in by any fund member or any related parties. This restriction aims to prevent the potential misuse of SMSF benefits. There are additional restrictions on improving or renovating residential property owned by an SMSF.

4. Commercial property

SMSFs can also be used to purchase commercial property such as office buildings. Because commercial property falls under ‘business real property’, it is an exception to the related party acquisition rule meaning that it can be acquired from a related party. There are fewer restrictions on commercial property investments compared to residential property, which is often a more preferred property investment option for SMSF purchases.

Based on your financial circumstances, an SMSF may offer greater autonomy in managing your superannuation and shaping your retirement strategy. If you are considering making an investment in commercial property through your SMSF, our team at Keystone Lawyers can provide you with qualified and experienced advice to ensure that your SMSF property purchase and investment are legally complaint.