Courtney C. Lipsey Self Managed Super Funds are a popular trend in Australia. This has been the case since 2007 when Self Managed Super Funds could be used to borrow money for assets. The Australian Taxation Office’s (ATO) figures show that since 2007, there has been a steady growth of 516,925 SMSFs in Australia.
You must realize that investing in real estate with superfunds is not easy. You will, therefore, need to research the procedures involved thoroughly. This option is best for those who have 15 to 20 years until retirement. They have the time and money to contribute.
Before you take the plunge, there are a few things that need to be considered. Here are some tips that can help you buy property through SMSFs.
Before investing, you should know the following:
Investment Strategy
Prior to any investment, it is important to develop an Investment Strategy. SMSFs are no different since they help you to determine your investment objectives and the type of investments that you can make.
There are several things to consider when creating a strategy for investing in real estate, whether it is personal or business.
- All fund members’ personal information, such as age and risk tolerance
- Conversion of fund assets into cash is easy to do to cover fund expenses.
- The ability to pay for retirement benefits and other expenses with the money it has.
- Members’ obligations
Restriction
When investing in real estate with SMSFs, there are some rules and requirements that you should be aware of. Most people create SMSFs to receive an attractive tax rate of 15% per year. For this tax rate, investors must follow certain guidelines.
- The purchase of the property must be solely for the benefit of the members. The property must not be purchased for personal use.
- You can’t buy the property from a relative.
- The fund member or their relatives may not reside in the property.
- Renting property is not allowed for fund members or their relatives.
Fund members who fail to adhere to any of these restrictions may be subject to penalties, disqualification from being a trustee, or even prosecution. In order to elaborate on these restrictions, “related parties” are referred to here.
- You can also contact your relatives.
- Each member’s business partners
- A spouse or child
- Any company controlled by fund members or their associates
- The fund member or their associates oversee any trust.
- Employers who contribute to your superfund for a member
- Business partners and companies or trusts that an employer controls;
- Companies and trusts that control the employer
The rules and restrictions apply to businesses administered by SMSFs. There are some additional requirements.
- The trust deed must allow the business to be conducted.
- The sole purpose of the business is to cater to the retirement benefits of members of the fund.
Investments in commercial property must be done at a distance, meaning that neither party must be under any coercion or pressure from the other.
Test for the sole purpose
To be eligible for the tax benefits, SMSFs must also meet the sole-purpose test. The sole purpose test ensures that your fund is maintained to provide retirement benefits to members or their dependents in the event of a member’s death before retirement.
If you fail to comply with the sole purpose test, you may lose the tax concessions and face criminal and civil penalties. This test may be forgotten if, for example, you offer someone a benefit before retirement or you, or anyone else, directly or indirectly receives a financial gain when you make investment decisions or arrangements. This does not include doing it to increase your fund’s return.
Borrowing power
The Limited Recourse Borrowing Arrangement, or LRBA, is a strict set of conditions that must be met by SMSFs who wish to borrow money for property investment. Your SMSF fund is only allowed to borrow money in certain circumstances.
- If you borrow for 90 days or less, the maximum amount that can be borrowed is 10% of your total fund’s assets. This will allow you to pay members’ benefits and meet a surcharge liability.
- If the borrowing is not more than 10% of the total assets of your fund, you can borrow money for up to seven days in order to settle security transactions.
- Borrowing using limited recourse arrangements or installment warrants that meet certain conditions.
A trustee can use a limited recourse loan arrangement to fund the purchase of an asset in a separate trust.
You can only use a limited recourse loan arrangement to buy a commercial or residential property. LRBA also allows investors to cover expenses related to property purchases, such as stamp duty, brokerage, and conveyancing. LRBA can’t be used to buy vacant land and then build a house on it. This would alter the characteristics and nature of the asset.
The conclusion of the article is:
You should do thorough research if you plan to invest in real estate through your SMSF. Self Managed Super Funds are not for everyone due to their many requirements. If you are still unsure and think it is worth trying, you can speak to an expert who will help you make sure that you comply with all the relevant laws. You don’t want to end up on the wrong side, especially if you don’t know what you are doing.
To avoid paying higher premiums and being restricted by health or age issues, you should also check the security of your insurance options before closing your super account.
Credit Hub can assist you with setting up an SMSF and streamline the entire process of purchasing your property using a managed fund. Contact our advisors to find out how we can assist.
