Property just won’t stop. CoreLogic’s monthly indices to end of May 2017 show that across Sydney, Melbourne, Adelaide, Brisbane and Perth, values are up 8.45 per cent in a year. For Sydney and Melbourne, this figure rises to above 11 per cent.
With prices pushing the million dollar mark (and beyond) in many sought-after locations, it’s harder and harder for everyday Australians to buy real estate. However, they can do this through an SMSF – as long as everything is above board and compliant.
What does it take to buy a property with an SMSF?
Requirements for buying property with an SMSF
The aforementioned growth in residential property makes it a popular target for investors – especially those with SMSFs. However, to ensure ongoing SMSF compliance, trustees must be careful with the following:
- Related party purchases. Under section 66 of the SIS Act, residential property cannot be purchased by an SMSF for a related party unless it is for listed shares or business real property. See our piece on the arms length rule for more information on this.
- Related party use and sole purpose. An SMSF can purchase a holiday home, but trustees, members or related parties cannot use it even if market rents are paid to the fund. Holiday homes should have formal documentation in place for all short term leases including guest occupying the property, check in and departure dates, and any other restrictions relating to visitors.
- Borrowing to acquire a property. SMSFs can borrow funds to purchase a property, but very strict requirements apply. This is called a limited recourse borrowing arrangement.
- Appropriate insurance. SMSF trustees must have appropriate insurance in place. The documents should clearly show it is a rental property not owner occupied, and if a short term holiday accommodation this should be in the policy.
- Lease agreements. These must be comprehensive to show the ATO that trustees are protecting the funds’ assets and income streams. Maintenance, repairs, timing of rent, etc. should all be clearly outlined and receipts kept.
- Liquidity. If an SMSF-bought property has no rental income, minimum pension payments could be impacted and the home may have to be sold.
Trustees must take care if a purchase is to pass an SMSF audit.
This is just the beginning of the requirements. Investing in real estate through an SMSF is an excellent way to boost both capital gains and income, but the pitfalls and legal technicalities are numerous – trustees must take care if a purchase is to pass an SMSF audit.
Make sure SMSF property purchases are compliant
Trustees have the final word on whether their SMSF should invest in property, but it’s up to accountants, financial professionals and other advisers to ensure they do so in a fair and compliant manner. Talk to the team at Audit your Superfund for any queries about the compliance of a property purchase.