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Investing your SMSF in real property can be a profitable strategy. Trustees may not be aware of several issues that should be considered when choosing this option. The tax office raised some concerns about how holding real property can affect other aspects of the fund, such as benefit payments. There are also stipulations that a trustee might not be aware of regarding; borrowing, property usage, location and liability.
Strategy of Diversification
There are many things to consider when choosing to diversify your SMSF. Trustees are required to invest according to the investment strategy including taking into consideration diversity and liquidity. Also, consideration of the fund having sufficient liquidity to pay minimum pension payments should be made.
Limited Borrowing
The superannuation laws are pretty strict when it comes to borrowing as well, and is only available in specific cases. The Limited Borrowing Arrangement (LRBA) must be made on commercial terms to avoid adverse income tax repercussions. For example income that is categorised as “non-arm’s length” would attract non-concession tax rates.
Related Parties Compliance
Leasing your investment property to a related party is another potential risk. The trustees must comply with the laws such as; In-house asset rules, sole purpose test and arm’s length requirements. If you have any questions about compliance make sure to contact this office for assistance.
Retirement Usage
Property investments must continue to be maintained under the superannuation laws in regard to many aspects including the sole purpose test and in-house asset laws. Members are not allowed to lease or occupy the investment property without the asset being sold or transferred to the member as a benefit. The governing rules of the fund also need to be strictly adhered to. Trustees may also be subject to capital gains tax (CGT) if the property is transferred to any member.
Property Location
There could be risks and issues associated with property investments located in an offshore jurisdiction. There is no specific guidance other than the superannuation laws regarding this. The Tax Office emphasises that it is not their role to provide any kind of investment advice and urges investors to do in-depth research before investing offshore. The trustees are ultimately responsible for their fund and the Tax Office encourages trustees to seek professional council before making investment decisions.
Insurance and Liability
One more important thing to consider is the possibility of unforeseen events. Having the correct insurance can play a huge role in protecting your fund. The trustees need to consider the following types of cover:
- General Insurance – This could provide adequate cover to protect the property for repairs or replacement costs when damage occurs.
- Third-Party Liability Insurance – As a property owner your fund can be sued. If this happens it could prove to be a costly risk to any assets without this insurance.
- Death or Permanent Disability Insurance – Policy proceeds can be used to assist with on-going costs or obligations including if the property is used as a business.
Do it Right!
Property investments can be a lucrative choice and play an important role in your SMSF. This does not come without risks, so make sure to do your research and consult a professional SMSF advisor before making decisions. Our office can answer any of your questions regarding tax implications and your SMSF.
Disclaimer:
Hillyer Riches Management Pty Ltd is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.
