Property investments within SMSFs: what are the rules?

A self-managed super fund (SMSF) is considered one of the better ways to manage and plan for retirement, and is an attractive option thanks to the ability to invest in property via an SMSF.

However, when it comes to investing in property via a self-managed super fund, there are several rules that need to be followed to remain compliant.

Here’s what you need to know.

How can an SMSF invest in property?

A self-managed super fund (SMSF) can invest in property in the following ways:

• Directly
• Through an ungeared unit trust
• Through a geared unit trust
• Through a pre-August 1999 unit trust
• Via a joint venture
• Via tenants in common
• With borrowings via a limited recourse borrowing arrangement (LRBA).

Ungeared unit trusts and property: what are the rules?

The superannuation rules allow a self-managed super fund to invest in an ungeared unit trust (or company) that owns property, as long as the rules are followed.

These are the requirements:

• No borrowings or loaning money (e.g. unpaid distributions)
• Property is not leased to a RP (related party) unless it is BRP (business real property)
• Property has not been acquired from a RP unless it is BRP
• Entity does not carry on a business
• Entity does not have an investment in another entity (e.g. shares).

Using an ungeared unit trust, an SMSF and a related party (e.g. a member) could each own units in an ungeared unit trust that owns property.

This could be used when the fund does not have sufficient money to purchase the property outright.

The SMSF can acquire units in the unit trust from the related party in the future. Again, the rules would need to be followed and any tax or stamp duty implications would need to be considered.

Geared unit trusts and property: what are the rules?

If a related party geared unit trust was invested in by an SMSF before 11/08/1999 it is considered a grandfathered complying investment.

However, post 11/08/1999 geared unit trusts can be invested in if:

• The in-house asset (IHA) rules are relevant (if related party; only up to 5% allowed)
• The SMSF can invest in a geared unit trust, as long as the trust is not considered a related party. A related party is normally where more than 50% of the entity is owned or controlled.

Limited recourse borrowing arrangements (LRBAs)

Self-managed super funds can borrow to acquire a single acquirable asset, such as land or a building.

The acquirable asset is held in trust (in a custody or bare trust). The fund has the right to acquire legal ownership of the asset by making one or more payments.

It is important to note the following for LRBAs:

• Rights of the lender are limited to rights relating to the acquirable asset
• Asset can be property, shares, or other investments
• Cannot improve or change the nature of the property.

Issues regarding LRBAs

In 2014, the ATO issued a determination that once debt is repaid it can keep property in the custody trust.

If the property remains in custody trust, it cannot improve or change the property.

If the property is transferred, you can wind up the custody trust or company.

Normally, there is no stamp duty on the property transfer as long as:

• The custody trust was correctly established
• You can show that the fund provided all the purchase money
• The SMSF has paid the deposit.

As all the major banks are now out of the LRBA lending market, if an SMSF wants a LRBA the fund will need to do so via second tier lenders (e.g. Liberty Finance) or via a related party loan.

Currently, interest rates from external lenders in relation to new loans are typically about 6% per annum.

Can you develop a property within an SMSF?

A self-managed super fund can develop property as long as it complies with the Superannuation Industry Supervision (SIS) Act.

As per the Australian Taxation Office’s (ATO) advice on carrying on a business in an SMSF, the following applies:

• An SMSF is not prohibited from running a business
• Running a business must be:
  • Allowed under the Deed
  • Operated for the sole purpose of providing retirement benefits
  • Not cause sections of SIS to be breached (e.g. borrowing rules).

Need help navigating property investment within your SMSF?

If you need guidance on investing in property within a self-managed super fund, or if you need to review your SMSF investment strategy, our superannuation experts at LDB are perfectly placed to help.

Simply get in touch by calling (03) 9875 2900 or send us a note via the contact form below.