Can you use an SMSF to buy residential and commercial property?

Finance Nov 24, 2022

3 min read

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Having the ability to choose what assets you invest in, including direct residential and commercial property, is something you don’t have when investing via a traditional superfund. Therefore, setting up a Self-Managed Super Fund (SMSF) can be a very attractive proposition for many. Granting greater flexibility to choose what you invest in for the long term.

What type of property can you buy?

An SMSF can be used to buy a residential property but there are several restrictions associated with doing so:

  • A trustee or anyone related to the trustee, cannot live in a residential property that you have purchased through the SMSF
  • A trustee or anyone related to the trustee, cannot rent the property purchased through the SMSF
  • The SMSF cannot buy a property owned by a trustee or anyone related to the trustee
  • The purchase must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members

The objective of the sole purpose test is to ensure that the SMSF is used for the sole purpose of providing benefits to members upon their retirement or their dependents in the case of the member’s death before retirement. It’s essentially the golden rule of SMSF property investment.

In addition, you can’t absorb an existing residential home that a trustee owns into the SMSF by purchasing it.

It’s also important to note that purchasing a property with funds from the SMSF is very different to purchasing one with an SMSF home loan. That’s an entirely different and more complex kettle of fish which we’ll get into later.

Commercial property for the win

However, commercial property is generally more popular with SMSF investors than residential property. Buying commercial property through an SMSF is still bound by the same restrictions as buying residential property, such as the sole purpose test.It’s common-place that small and medium-sized enterprises (SMEs) will buy commercial property through an SMSF and lease it back to themselves by paying rent to the SMSF. This is legal provided it is maintained on an ‘arm’s length basis’. This basically means that all investments should be managed on a strictly commercial basis, with the assets reflecting their true market value.

As well as the sole purpose test, there are several other conditions that you need to follow if you’re considering this:

  • The terms of the lease must be commercially competitive and/or market value.
  • You can’t give your business mates rates and lease the property for way less than it’s worth to yourself to save yourself money.
  • You’re required to get regular valuations on the property to ensure the rent you’re paying is the appropriate market value.
  • You must pay your rent on time, in full, every time. You can’t pay a day or two late because you had a less than successful week, just like in any other rental agreement.

Failure to follow these conditions will result in your lease not being compliant. SMSFs are monitored by the ATO which regularly audits them to ensure you are compliant, so it’s not worth flouting the rules. Additionally, you’re required to audit yourself annually.

To discuss buying property through your SMSF and SMSF lending, get in touch by hitting the button below.

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