Property can form part of an SMSF investment strategy, but the rules are stricter than buying an investment in your own name. A structure that looks commercially sensible can still create a serious compliance problem if a member receives a present-day benefit or a transaction involves a related party.

The investment must support retirement benefits

An SMSF must be maintained for the sole purpose of providing retirement benefits—or permitted benefits on death or incapacity. Trustees should be able to explain how the property fits the fund’s written investment strategy, including expected return, risk, liquidity, diversification and the fund’s ability to meet expenses and member benefits.

Residential property cannot be used by members

A residential property owned by an SMSF generally cannot be lived in, used as a holiday home or rented by a member, relative or other related party. The property should be managed as a genuine arm’s-length investment, with commercial lease terms, rent collection and expenses properly documented.

Buying from a related party is restricted

An SMSF is generally prohibited from acquiring assets from a related party. One important exception can apply to business real property acquired at market value. Business real property is broadly land and buildings used wholly and exclusively in a business, subject to detailed rules.

Do not assume a property qualifies merely because some business activity occurs there. Obtain specialist advice before signing a contract or transferring an existing property into the fund.

Borrowing rules are highly specific

SMSFs are generally prohibited from borrowing, although a properly structured limited recourse borrowing arrangement may be permitted. The acquired asset is usually held in a separate holding trust, and the lender’s rights are limited to that asset if the loan defaults.

The structure needs to be correct before the purchase contract is executed. Establishing documents in the wrong order can create stamp-duty, tax, finance and compliance consequences that may be difficult to reverse.

Renovation and development can be complicated

Repairs and maintenance may be allowed under a limited recourse arrangement, but borrowed money generally cannot be used to improve the asset. Significant development or changing the character of the property can create additional issues.

All dealings must be at arm’s length

The purchase price, rent, management fees, loans and other dealings should reflect normal commercial terms. Keep independent valuations, contracts, invoices, lease documents and evidence supporting every significant decision.

Allow for cash flow and concentration risk

Property is not easily converted to cash. Trustees need to consider loan repayments, rates, insurance, repairs, audit and accounting costs, vacancies and the fund’s future need to pay pensions.

Before signing anything

• Review and document the investment strategy.
• Confirm the proposed transaction satisfies SMSF and related-party rules.
• Obtain legal, lending, tax and financial advice appropriate to the transaction.
• Check the contract purchaser and holding-trust structure before signing.
• Model the fund’s cash flow under higher interest rates and vacancy periods.

Golden Mane Advisory can assist with SMSF accounting, annual returns and compliance records and work alongside your licensed financial adviser, lawyer and auditor.

This article is general information only and is not personal financial, legal or credit advice. SMSF property transactions should be reviewed before any contract is signed.