Investing in Property through an SMSF
SMSFs can acquire property directly or indirectly through property trusts or via a Limited Recourse Borrowing Arrangement (LRBA).
Direct Property Investments
A direct property investment is the direct purchase of a specific residential or commercial property, using cash (no borrowings). The property would be unencumbered, i.e. not used as security against any borrowings.
The property cannot be leased to a related party of the SMSF with the exception of Business Real Property. Meeting the definition of ‘Business Real Property’ can get complicated and there is a tax office ruling dedicated to this concept – SMSFR 2009/1.
Tenants in Common
Tenants in Common is a structure where an SMSF co-owns a property with another party. Tenants in Common have fixed entitlement in the property and can be unequal shares. For example, one party may own one third and the other owns the remaining two thirds.
Indirect Property Investment
Unlisted Unit Trusts
An unlisted unit trust is where a group of investors pool their money together under a trust structure and buy a property under the name of the trust. An SMSF would acquire units in the unit trust thereby owning a share in the property indirectly. This is a common strategy where an SMSF has insufficient capital to acquire the property directly.
The other investors in an unlisted unit trust can be related or unrelated. Where the other unit holders are related, there are strict rules the unlisted unit trust must follow.
The trust must comply with section 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (SISR). The trust must:
- Not borrow
- Not lease the assets to a related party of the SMSF. With the exception of a lease relating to Business Real Property.
- Not invest in another entity e.g. shares in a company
- Not subject the property to a charge i.e security for a mortgage
- Not purchase a property previously owned by a related party. An exception applies to Business Real Property acquired at market value.
Please note the above is a highly simplified form of the criteria set out in Reg 13.22C of the SISR and the full criteria of the law must be satisfied to ensure the investment is not considered an In-House Asset.
Listed Property Trusts & Real Estate Investment Trusts
Listed Property Trusts and Real Estate Investment Trusts (REITs) are of a similar structure to unlisted unit trusts but they are list on the stock exchange. An SMSF can purchase units on the market and because they are listed on the stock exchange, they are easily purchased and sold thereby improving liquidity.
An SMSF can borrow to invest in property directly. Section 67A of the Superannuation Industry (Supervision) Act 1993 (SISA) provides an exemption from the prohibition of SMSF Borrowing. The basic principles of section 67A are as follows:
- The borrowing is applied for the acquisition of a ‘single acquirable asset’ *see below
- The borrowing must be used to purchase an asset that is to be held on trust
- The asset being purchased under this arrangement must not otherwise be prohibited from being acquired by the SMSF under superannuation laws.
- The asset is held on trust so that the SMSF receives the beneficial interest
- The SMSF has the right to acquire legal ownership
- The lender’s right to recoup against the loan must be limited to the recovery from the specific asset (limited recourse)
* Single Acquirable Assets – the purchase of land or land with a house would meet this definition. However, sometimes there may be multiple titles in a single purchase which may suggest that the property is not a single asset. If the property is considered multiple assets, separate LRBAs will be required for each asset. Where there is a physical or legal impediment to the property that prevents it from being sold separately, it may constitute a single asset e.g. a building built over multiple titles.
Can a SMSF property be purchased from a related party?
Section 66 of the SISA prohibits the SMSF from acquiring assets from its members or related parties with the exception of Business Real Property and listed shares. It is important to note that residential property is not included in this exception.
Furthermore, if the property being purchased does meet the Business Real Property exemption, it must also be acquired at market value. The valuation must be based on objective and supportable data. Although the valuation guidelines do not insist upon independent or external valuations in all circumstances, the ATO recommends the use of a qualified independent valuer to determine the market value.
The superannuation laws are complex and it is of paramount importance to consider obtaining professional legal, accounting and financial advice before investing in property using your SMSF.
Speak to one of our SMSF Property Experts or Investment Property Tax Accountants
Speak to one of experienced SMSF Accountants in Sydney. Leanne Tinyow is Economos’ Head of SMSF Services and is in charge of the compliance and administration of over 400 Self-Managed Super Funds. She is also well versed in helping new clients with SMSF setup and sdministration and can answer several SMSF property related questions.
Alternatively, if you would like to speak to one of our experienced Property Tax Accountants, George Shahinian is Economos Managing Partner and has extensive experience with investment property tax and deductions including dealing with Development and sub-division, Commercial Fit-out and refurbishments, Building and Construction and Construction Management and Real Estate agencies.