Buying property with a self-managed super fund is different to just going out and buying any property you like. The first thing to know is that if you purchase a residential property from your self-managed fund you cannot live in it or even holiday in it. If you’re looking at buying it for holiday letting, you can’t stay in it during the off-peak season for example.
The Superannuation Industry (Supervision) Act 1993 (SIS Act) is the superannuation legislation and the statutory bible for all superannuation funds. It governs everything to do with superannuation. The SIS Act, has a sole purpose test.
The sole purpose test is basically your predetermining factor for any self-managed super fund or super fund in general, and the super fund needs to provide solely for members in their retirement. So if a strategy or an investment or anything that the super fund does, doesn’t meet that sole purpose test, then it’s generally prohibited by the SIS Act. The sole purpose test says that you must buy an asset for your superannuation fund for the benefit of the members in their retirement. And holiday letting, unfortunately, doesn’t actually fall into that category.
- Must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- Must not be acquired from a related party of a member
- Must not be lived in by a fund member or any fund members’ related parties
- Must not be rented by a fund member or any fund members’ related parties
However, your SMSF could potentially purchase your business premises, allowing you to pay rent directly to your SMSF at the market rate.
Further, it is important to understand that under the current legislation, purchasing a property through a SMSF is what is known as a stand alone transaction. What that means is that once it is established, it is set in stone. It basically means that, for example,if you decide to pay the loan down more quickly than you’re contracted to do and you want redraw access to those funds, you have no redraw. Be very, very careful. It is like layby. If you were to walk into Kmart, for example, and put something on layby with a deposit and the next day walk in and pay $50 off that layby, you can’t then walk in the day after and say, “Can I have my $50 back?”. It just doesn’t work like that. So effectively it’s almost a layby where the custodian is holding that property for the super fund until that outstanding obligation is repaid.
Also, this investment strategy is what is known as a limited recourse transaction, which means the property you are buying is the only property of the super fund that is at risk. If everything went pear shaped and you had to sell that property or the bank had to sell the property for you, they cannot access any other assets within the super fund. The fact that the assets are protected is one of the key considerations for restructuring or looking at your long-term strategies in regard to your super fund. You do not want to set up a transaction that will risk any of the other assets in your superannuation fund.