Many people look to establish an SMSF purely to purchase a residential property. Whilst there are many advantages to holding a property in an SMSF including, accessing a pool of money you can’t normally touch and the lower rate of tax payable on income and capital gains.
The downside is that the superannuation environment is heavily regulated and there are a number of rules which trustees need to be mind full of.
Firstly are the restrictions on acquisition. You cannot purchase a residential property from yourself, your relatives, family companies or family trusts regardless of whether it is purchased on commercial terms at market value.
Secondly are the restrictions on use. A residential property cannot be used by yourself, or anyone related to you including private companies and trusts even if commercial rates of rent are being paid. Even in retirement this still applies. If a related party wants to use the property, it must first be transferred out as a benefit payment.
Thirdly involves the valuation of the property. The legislation governing an SMSF requires that all assets are recorded at market value. This implies that trustees of the fund will need to be responsible for ensuring that they provide a market value of the property to their accountant each year. This can be done by an online property valuation service, a real estate agent or even the trustees themselves. Consideration needs to be given to the value of similar properties in the area and what like properties have been sold for. Consideration should also be given to whether there have been improvements made since the last valuation.
In addition to the above care should be taken when signing contracts that the correct name is being reflected. If there is a borrowing involved the name on the contract may vary depending on which state the property is in. Recording assets in the wrong name can not only have adverse consequences on the fund but can also result in the payment of double stamp duty to correct the error. If in doubt seek expert advice!
Business Real Property
Business Real Property is one area of the Australian superannuation legislation where concessions abound. However, it is vitally important to ensure that the requirements of the Superannuation Industry Supervision Act 1993 (SIS Act) are satisfied under Section 66 (5) in order to ensure that the concessions are available to your SMSF without adverse repercussions.
Business Real Property Concessions
Concessions are available for real property which is used “wholly and exclusively” in one or more businesses, as the name implies. Providing an asset satisfies this definition, an SMSF may be allowed to acquire this asset from, or lease this asset to a related party without breaching the prohibition on related party asset acquisitions (Section 66 (1) SIS Act) or creating an ‘in-house asset’ (see in-house assets). Business Real Property may be acquired by an SMSF from a related party, where the fund provides consideration that reflects the true market value of the property. The property may also be leased to a related party on commercial terms at an appropriate level of rent so as to reflect the market rate.
Satisfying the Requirements
‘Real Property’ here refers to land over which a specific title can be held and includes anything fixed to the land, such as buildings, fences and bridges.
‘Whole and Exclusive’ use of the property in one or more businesses excludes the property from being used for anything other than business purposes. It could not therefore provide residential accommodation (unless this is the business being operated from the premises). Where the property is used for primary production purposes however, a private dwelling is permitted, providing it is not situated in an area of land more than 2 hectares and providing it does not constitute the main use of the whole property.
The ATO have provided further clarification in SMSFR 2009/1 on when an asset may/may not apply the Business Real Property exemptions, including 37 specific examples.
Business Real Property is not exempt from the general prohibition on borrowing in an SMSF, except to the extent that the borrowing is a limited recourse borrowing arrangement in line with Section 67A of the SIS Act.
National Rental Affordability Scheme (NRAS) Property Investment
The National Rental Affordability Scheme (NRAS) is funded by both the state and federal government to address the shortage of affordable rental housing to low and moderate income households at 20% below market rates. The scheme was introduced in 2008 and has shown to be a popular investment amongst the SMSF space.
The good news for SMSF trustees is investing in an NRAS property is permitted under SIS Legislation but what are the advantages and more importantly the disadvantages of such investment?
- The main advantage is unlike business real or commercial property, NRAS property investment is typically cash flow positive and is earning you an income from the first year!
- To compensate for the reduced rent an SMSF trustee would receive, the fund receives a combination of refundable tax offsets and non-taxable incentives.
- The properties can be in the NRA scheme for up to 10 years but can also be removed from the scheme and sold as normal at any point during those 10 years.
- The offsets and incentives received by the government currently amount to approx. $10,661 per annum for the 10 years they are on the NRA scheme and are indexed annually. This is a flat rate regardless of the property type, value and rental income. This can boost the fund’s investment performance and retirement pool.
- The property, like all property investments in an SMSF will only be subjected to 15% capital gains or 10% if the property is held for more than 12 months. If the asset is held whilst in pension phase, it will also be exempt from CGT.
- You may have difficulty sourcing a lender for the purchase of an NRAS Property if you need to borrow money to fund an acquisition.
- Management fees can be higher than that of a normal property due to the compliance aspect. It can often range from 9-11% of the weekly rental income.
This information is provided by SuperGuardian Pty Ltd, AFSL No. 485643. The information is general information only and does not take into account your objectives, financial situation or needs. You should obtain professional advice before acting on any of this information. Please refer to SuperGuardian’s FSG (available at https:// www.superguardian.com.au/pdfs/Financial-Services-Guide.pdf) for contact information and information about any remuneration and associations with product issuers.