SMSFs and property acquisitions

Recently released ATO data has revealed a surge in new SMSF registrations, with new establishments increasing by 35% in the March 2020 quarter.

While early access to superannuation allowed under the COVID relief measures is believed to be a factor, new SMSF trustees are clearly reviewing the allocation of their superannuation assets.

The Australian love of property investments and movement in values in recent times has led to approximately one fifth of SMSF investments being held in direct property. However, the complexities of property acquisition can vary, and it is incredibly important that SMSF trustees consider all the issues prior to making a purchase.

There are a variety of options for SMSF trustees to consider when structuring the investment and the more planning the trustees do beforehand, the more they will benefit in the long run. The simplest acquisition is where an SMSF acquires whole ownership of a property without requiring finance however, this is not always possible and other options may need to be considered.

A joint acquisition of property by an SMSF with another party (be that another SMSF, individuals, etc.) can be an option for an SMSF who does not have the capital to own the property wholly but does not wish to or cannot borrow. There can be added benefits where the acquisition of the property could potentially be utilised as a contribution to the SMSF in the right circumstances, for instance, where a party transfers their interest in business real property to the SMSF as an in-specie contribution. However, the parties to the contribution will need to take contribution caps, capital gains and stamp duty into consideration as part of an in-specie contribution.

These arrangements can become complicated if all owners are not made aware of the restrictions that will be placed on them by having the SMSF involved in the ownership structure, including not being able to use the property as security for their debts. The ongoing administration of owning the property should also be considered as rent and costs will need to be apportioned between the owners and this task can be onerous for some trustees. SMSFs can also invest in property with other owners through a unit trust, but these need to be structured and maintained carefully to comply with the superannuation law.  

In these arrangements, the investors each hold units in the unit trust, and the unit trust owns the property. The trust itself needs to meet specific rules to comply with superannuation law, including not maintaining any of its own borrowings, to avoid breaching what’s called the in-house asset limit (where the SMSF’s investment in the trust cannot be more than 5% of the value of the SMSF’s total assets).

The complexity of property acquisition through SMSFs means this strategy will not be suitable for everyone, and advice should be sought from a superannuation specialist when considering the acquisition of property for your SMSF as there are a number of tips and traps along the way, from the type of property and who it is being purchased from up to how the acquisition is being structured.

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This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.    
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