An SMSF is a private superannuation fund you manage yourself, regulated by the Australian Taxation Office. SMSFs are different from mainstream funds regulated by the Australian Prudential Regulation Authority (APRA) which pool members’ savings and invest the money for them. SMSFs can have up to four members. All members must be trustees (or directors if there is a corporate trustee) and are responsible for decisions made about the fund. If you have an SMSF, you are responsible for managing it and complying with all relevant laws.
Self-managed super fund property rules
You can only buy property through your SMSF if you comply with the rules.
The property must:
- meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- not be acquired from a related party of a member
- not be lived in by a fund member or any fund members’ related parties
- not be rented by a fund member or any fund members’ related parties
If your SMSF purchases a commercial premise, it can be leased to a fund member for their business. However, it must be leased at the market rate and follow specific rules.
SMSF property sales may have many fees and charges. These fees can add up and will reduce your super balance. Find out all the costs before signing up.
SMSF borrowing
SMSF home loans are more complex than regular home loans, as any property purchased must be for the sole benefit of the SMSF, not the individual trustees.
The property must also provide a market return, that will be used to benefit the super fund members when they reach the retirement age of 65.
While you can both borrow and loan money from an SMSF for the purpose of buying property, there are many restrictions, regulations and conditions that you must meet to ensure that the purchase is legal. If the purchase is not legal as per the Australian Taxation Office (ATO) guidelines, you may risk losing half of the assets in your SMSF, and face thousands of dollars in fines.
Borrowing or gearing your super into property involves very strict borrowing conditions. It is called a ‘limited recourse borrowing arrangement’. You can only purchase a single asset with a limited recourse borrowing arrangement. For example, a residential or commercial property.
You should assess whether the investment is consistent with the investment strategy and risk profile of the fund.
Geared SMSF property risks include:
- Higher costs – SMSF property loans tend to be more costly than other property loans.
- Cash flow – Loan repayments must come from your SMSF. Your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
- Hard to cancel – If your SMSF property loan documents and contract are not set up correctly, you can’t unwind the arrangement. You may have to sell the property, potentially causing substantial losses to the SMSF.
- Possible tax losses – You cannot offset tax losses from the property against your taxable income outside the fund.
- No alterations to the property – You cannot make alterations that change the character of the property until you pay off the SMSF property loan.
Key Considerations for Setting Up an SMSF
- Set Clear Objectives : Determine your financial goals for retirement and how an SMSF can align with those objectives.
- Establish a Trustee Structure : Decide whether you want to be an individual trustee or opt for a corporate trustee structure. Each has its pros and cons, and it’s important to understand the implications for liability and administration.
- Create an Investment Strategy : An SMSF must have a clear investment strategy, which must be reviewed regularly to ensure it aligns with the fund’s goals and the members’ risk profiles.
- Ensure Ongoing Compliance : Keep up with the latest superannuation regulations and ensure your fund meets all ATO requirements, including annual audits, tax returns, and record-keeping.
Conclusion
Self-managed super funds provide an excellent opportunity for those seeking more control over their retirement savings and investments. However, managing an SMSF requires careful planning, time, and an understanding of the regulatory environment. Before deciding whether an SMSF is right for you, it’s essential to weigh the benefits against the challenges and seek professional advice where necessary.
If you’re considering an SMSF or are in the process of setting one up, make sure you have a solid strategy in place and stay compliant with all legal requirements. By doing so, you’ll be on the right track to achieving your retirement goals.
Contact LMK Finance today to discuss how we can help structure your SMSF loan for optimal outcomes.