Investing in property through your superannuation has become increasingly attractive for many Australians looking to build their retirement nest egg. With the east coast property market’s historical performance, it’s no surprise that self-managed super funds (SMSFs) are exploring property investment options. But before you rush into using your super to buy that investment property, you need to understand the complex rules and strict regulations that govern SMSF property purchases.

What Exactly Is an SMSF?

A Self-Managed Superannuation Fund (SMSF) is a private super fund that you manage yourself. The main purpose of an SMSF is to provide retirement benefits to its members. An SMSF can typically have no more than six members, each of whom must be an individual trustee of the fund or a director of a corporate trustee of the fund.

Can Your SMSF Actually Buy Residential Property?

Yes, an SMSF can buy residential property, but there are strict rules that must be followed:

The property must be bought solely for the purpose of providing retirement benefits to fund members (this is called the “sole purpose test”). The property cannot be lived in by a fund member or any related parties while it is owned by the SMSF. The property cannot be rented to a fund member or any related parties.

The Golden Rule: No Personal Use Whatsoever

This is where many people’s property dreams through super come unstuck. You, your family, or any related parties cannot live in or rent the property while it’s owned by the SMSF. Period.

If you’re thinking of buying a place with your super for Mum and Dad to live in, or acquiring that beach house in Byron Bay for weekend getaways, think again. The Australian Taxation Office takes these rules seriously, and breaching them can result in significant penalties and potentially the loss of your fund’s concessional tax status.

Everything Must Be at Arm’s Length

All dealings must be at market value and on commercial terms. You cannot buy the property from a related party, except in very limited circumstances (generally only for business real property, not residential).

This arm’s length requirement extends beyond just the purchase itself. Any repairs, maintenance, or property management services must be completed by appropriately qualified professionals who are paid at market rates. You can’t save money by doing the renovations yourself or getting your mate to do the plumbing for mates’ rates.

Borrowing to Buy Property: The LRBA Structure

SMSFs can borrow to buy property using a special structure called a Limited Recourse Borrowing Arrangement (LRBA). This isn’t your standard home loan, and the setup is considerably more complex.

To establish an LRBA, you’ll typically need to set up a separate trust (called a bare trust) with its own trustee (called a bare trustee). The property is purchased in the name of the bare trustee (usually a company) and held by the bare trustee for the benefit of the SMSF.

Why this complicated structure? Under an LRBA, the lender should only have recourse to the asset underpinning the loan: the property itself. By holding the property in a bare trust for the benefit of the SMSF, the lender cannot pursue all the assets of the SMSF if the investment doesn’t work out. They can only foreclose on the property.

SMSF borrowing is strictly regulated by the Superannuation Industry (Supervision) Act 1993 (SIS Act), and getting it wrong can have serious consequences.

The Property Buying Process Through Your SMSF

Step 1: Set Up the SMSF Properly

Your SMSF must be properly established with its own bank account and Tax File Number (TFN) before you can even think about purchasing property. If you’re planning to borrow, you’ll also need the bare trust and bare trustee structure in place, as the bare trustee will be the entity that enters into the contract to purchase the property.

Professional advice from both an accountant and a financial advisor at this stage isn’t just recommended; it’s essential.

Step 2: Develop a Compliant Investment Strategy

Your SMSF must have a written investment strategy that specifically allows for property investment. This isn’t just a box-ticking exercise. The strategy needs to demonstrate how property investment aligns with the retirement objectives of all fund members and considers factors like liquidity, risk, and diversification.

Step 3: Arrange Finance If Needed

If your SMSF is borrowing to fund the purchase, you’ll need to establish the LRBA structure. SMSF lenders have specific requirements and typically offer lower loan-to-value ratios than standard property loans. Starting conversations with a mortgage broker who understands SMSF lending early in the process can save significant time and frustration.

Step 4: Purchase the Property

When it’s time to buy, the SMSF trustee (or bare trustee if borrowing) signs the contract and pays the deposit. It’s crucial that all money spent in connection with the property acquisition, including holding deposits (typically 0.25% of the purchase price) and legal costs, comes from the SMSF bank account, not your personal funds.

Professional Advice Isn’t Optional

Buying residential property through an SMSF can be a powerful strategy for building retirement wealth, but it’s not suitable for everyone. The rules are strict, the process is complex, and the penalties for getting it wrong can be severe.

Before proceeding, you’ll need guidance from:

• An accountant specialising in SMSF structures
• A financial advisor to ensure the strategy aligns with your retirement goals
• A mortgage broker experienced in SMSF lending
• A lawyer who understands the unique requirements of SMSF property transactions

Ready to Explore SMSF Property Investment?

If you’re considering purchasing residential property through your SMSF, don’t navigate these complex waters alone. Our experienced property law team understands the unique challenges of SMSF property transactions and can guide you through the legal requirements to ensure your investment complies with all regulations.

Book a consultation today to discuss your SMSF property plans and ensure your transaction is structured correctly from the start. Contact us online to arrange your appointment.