Property can be an attractive investment inside a Self-Managed Super Fund (SMSF). It feels familiar, tangible and for the savvy investor, it can play a valuable role in your long-term retirement strategy.
It’s important to know, SMSFs operate under strict rules. Getting property wrong inside your super can be expensive, both in penalties and tax. So before you proceed, it’s important to understand how the rules work and where trustees often get caught out.
Buying property through your SMSF
The sole purpose test
Every SMSF exists for one reason – to provide retirement benefits to its members.
This is known as the sole purpose test and it’s the foundation of every investment decision an SMSF trustee makes.
Before buying property, ask yourself:
Is this investment being made solely to improve members’ retirement outcomes?
- If the answer is “yes”, you’re on the right path.
- If the answer is “no” the investment should not proceed.
For example, if a trustee wants their SMSF to buy a property because it’s a strong, long-term investment for retirement, that is appropriate. However, if the real motivation is to free up personal cash or rescue a struggling asset, it would breach the sole purpose test.
Who can your SMSF buy property from?
SMSFs are free to buy property from unrelated parties (provided the sole purpose test is met).
However, buying property from members or related parties is heavily restricted.
Residential property: An SMSF cannot buy residential property from a member or a related party. Ever. So no buying a house from your parents, favourite Auntie or Uncle.
Commercial property: An SMSF can buy commercial property from a member or related party if:
- it qualifies as business real property, and
- it is purchased at market value.
To qualify as business real property, the land and buildings must be used wholly and exclusively in a business.
Personal use is not allowed with very limited exceptions for primary production land.
How will the property be used?
How the property is used after purchase matters just as much as how it’s acquired.
Residential property: If an SMSF owns residential property it cannot be rented to members or related parties, even temporarily. Doing so would breach the in-house asset rules.
Commercial property: Business real property can be leased to related parties but it must always be on commercial terms.
Vacant land: can be held for long-term growth, provided there is no personal use, and the investment is clearly aligned with retirement objectives.
Borrowing inside an SMSF: LRBAs
SMSFs can borrow to buy property but only under a Limited Recourse Borrowing Arrangement (LRBA) which are complex and tightly regulated.
It;s important to note that
- borrowed funds can only be used to acquire the property
- the property must be held in a separate holding trust until the loan is repaid
- substantial improvements are generally prohibited while the loan is in place.
We highly recommend specialist advice for LRBAs.
Buying a part interest in property
If your SMSF will only acquire part of a property then:
- ownership must be as tenants in common, not joint tenants
- the fund must only pay its share of costs
- care must be taken to avoid creating unintended related-party relationships
- other owners cannot use the property as security for their own borrowing.
Before you buy
Review the trust deed
Your SMSF’s trust deed must allow the transaction. Even if super law isn’t breached, acting outside the deed can expose trustees to legal risk.
Update the investment strategy
Property must fit within the fund’s investment strategy, including:
- diversification risks
- liquidity needs
- cash flow requirements
- pension obligations and estate planning considerations.
Get the legal and administrative details right
- The title must correctly reflect the SMSF trustee
- Purchase documentation must be carefully structured
- Overseas property introduces additional risks, including ownership, trust recognition and audit issues so be aware.
Leasing property
Where property is leased to related parties:
- rent must be set at market value
- a written lease agreement is essential
- rent must be paid on time and reviewed regularly
- insurance must correctly name the SMSF.
Auditors will expect to see evidence that all lease terms are strictly commercial. Even when leasing to unrelated tenants, written leases are strongly recommended.
GST considerations
Your SMSF may need to register for GST if it leases commercial property and rental income exceeds $75,000 per year. Registration decisions should be made before purchasing the property.
Be careful going DIY
Trustees are often surprised to learn they generally cannot charge their SMSF for work they perform, even if they have the skills.
- Minor maintenance may be acceptable if no payment or materials are supplied by the trustee.
- Major renovations or improvements often require third-party contractors to avoid tax and compliance issues.
Valuations and record-keeping matter
SMSF assets must be valued at market value each year. For property, acceptable evidence can include:
- recent purchase or sale prices,
- independent valuations,
- agent appraisals with comparable sales,
- trustee assessments supported by data.
Comprehensive records must also be retained including contracts, invoices, leases, insurance policies, and valuation evidence.
SMSFs receive generous tax concessions but only if the rules are followed. Property can be a powerful investment inside super, but mistakes can result in loss of tax concessions, penalties, forced asset sales, and tax rates of up to 45%.
If you’re considering property in your SMSF, get in touch with our specialist SMSF team to discuss your SMSF property future.
