A quick guide to buying property with your super

Summer is calling – and for many of us, that might include daydreaming on a beach while perusing the local property guide. You might be considering your available cash and finding that your bank account is somewhat depleted from Christmas spending, Black Friday Sales, and a couple of pre-Christmas cocktails you treated yourself to. Then, your mind turns to a certain lump of money that you can’t touch.

“What if,” you muse, “I could buy a place using my super?”

The answer is – perhaps… {and insert many, many conditions here}.

This snapshot explainer is for the daydreamers and perhaps also for business owners thinking about how to buy their business premises. But, a word of caution – those chasing a fantasy result won’t find it here. Buying a property with your super is not for everyone; it isn’t an easy fix, and there are legalities to be mindful of.

The rules of super and property

The first rule of property investing through super – and this one writes many people off from the start – is you need a self-managed superannuation fund (SMSF). You can’t buy a property in your industry or retail-managed super fund.

Those who have an SMSF or are familiar with it, would be well attuned with the fact that investments in these must suit your fund’s trust deed and adhere to superannuation laws, including that any investments must be made and maintained for the sole purpose of benefiting SMSF members.

What this means for property is that it isn’t as simple as picking up a nice Airbnb rental or your primary residence.

A property must:

• Meet the “sole purpose test”
• Not acquired from a related party of a member
• Not be lived in by a fund member or any other fund member’s related parties
• Not be rented by a fund member or any other fund member’s related parties.

In simple language? 

The property needs to provide a benefit to your retirement, such as via capital growth and rental income. You can’t buy it from friends or family – and you, your friends and family cannot live in it or rent it (also termed as being ‘at an arm’s length’ from the property in all your undertakings).

You can read more about SMSF restrictions here.

Of course, there is a slight exception to this and that is when it comes to commercial properties.

If you use an SMSF to buy a commercial property that you want your business to operate on, you can buy it from a related party provided the purchase is at market value and your business can then establish a formal lease agreement and pay rent at market rates – no discounts here.

An example of an SMSF buying commercial property is where family farmland is owned in the SMSF and leased back to the family to operate under a business agreement – the family may still live on the farmland under certain restrictions for the dwelling.

Or say, you bought the warehouse you wanted your business to operate from in your SMSF, then your business would need a formal lease agreement and needs to pay rent at market rates for use of the premises.

But… it’s the home of my dreams…

Let’s say you purchased a residential property, you would need to rent it out at market rate and treat it as an investment. That’s not to say you couldn’t ever live in it, but to do so, you would need to either… buy it from your SMSF at market value or, if you are retired, you could potentially transfer the property out of the fund by an inspecie-transfer.

The transfer would be considered as a lump sum payment to the SMSF member and would require an independent valuer, legal transfer and documentation, and there may be costs in terms of capital gains tax based on an increase in property value since the SMSF purchased it and stamp duty.

It’s a long and complicated path to primary residence, but there if you want it (and it fits with your SMSF’s investment strategy).

Borrowing and super

If you don’t have enough cash in your SMSF to outright purchase a property, you might be able to borrow to purchase it, but make sure the property fits all the other requirements and that you have factored how repayments on the loan will be financed. This is done under a ‘limited recourse borrowing arrangement’ (LRBA). 

The ATO has a detailed page on using LRBAs here that is worth checking out if you are considering going down this path.

Basically, it involves the SMSF getting a loan for the property and then the asset is held in a ‘holding trust’ separate to the SMSF. The SMSF still has access to the benefits of ownership, such as rental income, along with the ins and outs of ownership, like maintenance, and has the right to acquire legal ownership once it starts making repayments on the loan. The legal ownership of the property is transferred out of the holding trust to the SMSF once the loan is fully repaid.

The structure protects the other assets in the SMSF if you default on the loan.

Be aware that you can’t use the loan in an LRBA to make extensive renovations on a property or change it structurally – though you can use the funds for repairs and maintenance. If you wanted to make major changes, you’d need to use other funds from your SMSF and keep extensive records of this.

Other things to factor

Buying a property never just costs the offer you make on that property – don’t forget the other costs involved, such as upfront fees, legal fees, advice fees, stamp duty, property management fees (maintenance, rates, insurance), bank fees and loan costs.

Of course, as you need to remain “at arm’s length” from any property investment in a SMSF, some additional costs might also be commissions payable to developers and real estate agents.

To buy or not to buy

After reading all of this, you may well ask, “Why on earth would anyone do this?”

There are pros and cons to any strategy in life. People may consider property for their SMSF as a form of capital growth and rental income, or consider tax efficiency. For example, property management expenses are tax-deductible to the SMSF.

The flip side being the administration and costs of property management, as well as the fact you can’t use it as your personal residence.

Now that the daydream has been well and truly burst, if you were to go ahead, it’s worth considering expert advice to make sure you adhere to all the requirements and that the property truly meets with your SMSF’s trust deed. Take the time to read through the ATO's guidelines and keep up to date with any changes.

Property can be a solid investment when it’s for the right reasons and done properly - happy hunting.

Do you own a property in your SMSF? Share your lessons with other readers in the comments below.