Can you use an SMSF to buy residential and commercial property?

January 26, 2024 BY

Leigh Deledio and Daniel Walsh from UFinancial.

Investing with a Self-Managed Super Fund (SMSF) opens up a realm of possibilities for those seeking more control over their assets.

The ability to choose from a range of investments, including direct residential and commercial properties, makes SMSFs an attractive option for many investors looking to secure their financial future.

Residential Property Considerations

While an SMSF can indeed be used to invest in residential property, there are stringent restrictions in place to ensure compliance with the “sole purpose test”. This test mandates that the primary objective of the SMSF is to provide retirement benefits to its members. Notably:

  • Trustees or related parties cannot reside in a residential property owned by the SMSF
  • Renting the property to trustees or related parties is prohibited
  • The SMSF cannot acquire a property owned by trustees or related parties, and
  • The purchase must align with the sole purpose of providing retirement benefits.

Additionally, absorbing an existing residential property owned by a trustee into the SMSF through purchase is not permissible.

Commercial Property Advantage

Commercial property tends to be a more popular choice among SMSF investors due to its perceived flexibility. Similar to residential property, buying commercial real estate through an SMSF is subject to the sole purpose test. It is common for small and medium-sized enterprises (SMEs) to purchase commercial property through an SMSF and lease it back to themselves, provided it is on an “arm’s length basis”.

However, several conditions must be met:

  • Lease terms must be commercially competitive or at market value
  • Offering business associates discounted rates for personal gain is prohibited
  • Regular valuations are required to ascertain the property’s true market value, and
  • Timely and full rent payments are mandatory.

Failure to adhere to these conditions can render the lease non-compliant. As SMSFs are monitored by the ATO, strict compliance is essential to avoid penalties. Annual self-audits are also mandatory.

To delve deeper into the world of SMSF property investment and lending, feel free to reach out to us today and start the conversation.

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