If you have a self-managed super fund, it could take out a loan and invest directly into residential property, or even purchase your business premises.
There are complexities and very strict restrictions you need to be aware of, though.
Any property investment must fit within your fund’s stated investment guidelines
This means it must take into account:
- The impact on diversification (your fund must invest in a range of assets and asset classes)
- Impacts on liquidity – in meeting fund expenses and members’ benefits (when they retire). This must be managed carefully, not only because property is a relatively illiquid asset (hard to convert to cash), but also because of additional cash outlays that might arise, including the regular and irregular costs of maintaining a property investment (see Property Tips – Do Your Sums).
- members’ needs and circumstances.
Further, all investments by your SMSF must be made on a commercial ‘arms length’ basis
So the property:
- cannot be acquired from a related party of a member
- cannot be lived in by a related party of a member
- cannot be rented by a related party of a member
But, an exception is made for business real property
‘Business real property’ means land and buildings used wholly and exclusively in a business. In this case the property could be purchased by your fund and leased to your business at a market rate of rent. Primary production businesses, such as farms, are able to meet the test of being used wholly and exclusively in a business even if they contain dwellings (if the value of the dwelling is considered inconsequential compared with the value of the business).
Of course the investment must meet the ‘sole purpose’ test (see right) and fit the fund’s investment guidelines.
Super fund borrowing is also heavily restricted
Gearing your super into property must be done under a ‘limited recourse borrowing arrangement’, which restricts the lender’s security to the property asset. It can only be used to purchase a single asset, which is held in a special purpose trust. These requirements protect the other assets in the fund (in the event of the property investment failing to cover loan repayments).
As you can see, investing in property through your super is complex. If you’re considering it, make sure you get independent advice.
Beware of the Sole Purpose Test
Your fund must be maintained for the sole purpose of providing retirement benefits to members, (or to their dependants if a member dies before retirement).
If you contravene the sole purpose test, the fund may lose its concessional tax treatment, and the trustees could face civil and criminal penalties.
So you will need to make sure your property investment satisfies this purpose.
What are your thoughts?
Is anything else you’d like to know about Super fund property investment? Join the conversation — leave a comment below and let us know what you’re thoughts are.