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SMSF investing in real property
Ever thought of investing your superannuation in real estate?
For most Australian, their superannuation is their second largest asset after their family home. Many would like to be able to include real estate in their superannuation investment portfolio.
You can invest in real estate directly through your own self managed superannuation fund (SMSF).
Is it permitted
SMSFs must abide by the Superannuation Industry (Supervision) Act (SIS Act). A SMSF can invest in property as long as it is inline with the SMSF’s investment strategy. Investments can be made in both residential and commercial property.
A SMSF cannot purchase a residential property from a member of the fund or a relared party, and cannot lease the residential property to a member of the fund or a related party.
Commercial property can be purchased at market value from a member of the fund or related party and can be leased to a business related to a member on commercial terms. This is an attractive option for business owners to own the property that they run their business from.
Up until recently, unless a SMSF can afford the full purchase of the real estate, the SMSF was restricted from borrowing to fund the purchase. This was the main obstacle for many. The changes now allow SMSFs to borrow to invest in real estate through a properly structured arrangement.
The borrowing rules
The new sub-section 67(4A) of the Superannuation Industry (Supervision) Act (SISA) will allow a SMSF to borrow, but any borrowing must be in accordance with an arrangement that has the following features:
- the borrowing is used to acquire an asset that is held on trust so that the superannuation fund trustee receives a beneficial interest and a right (but not an obligation) to acquire the legal ownership of the assets through the payment of instalments,
- the lender’s recourse against the superannuation fund trustee in the event of default on the borrowing and related fees, or the exercise of rights by the fund trustee, is limited to rights relating to the asset, and
- the asset must be one that the superannuation fund trustee is permitted to acquire and hold directly (i.e. for example, a SMSF cannot acquire residential property from a member, but permitted to their acquired commercial property as would residential property from a non-related party).
Although the new sub-section allows superannuation fund to borrow, the borrowing must satisfy the conditions of the new-section. The general prohibition on borrowing remains in force.
It is important to note that the borrowing arrangement by the SMSF must be properly structured.
More information
Download our guide SMSF real property instalment warrant for more information or our article SMSF borrowing rules examined for a discussion on the borrowing rules.
Useful resources
The Australian Taxation Office has issued their view on instalment warrant type arrangement.
ATO Alert - TA 2008/5 (external link)
Instalment warrants and super funds - ATO questions and answers (external link)
We can help
If you are looking to investment in real estate through an instalment warrant type arrangement, we can assit you to set up the structure. Please contact us to discuss further. Our contact details.