Owning property through a self-managed superannuation fund (SMSF) has become increasingly popular in recent years. The major appeal of SMSF ownership for many superannuation fund members is the potential for more flexibility and control over their retirement savings, including purchasing direct residential property or commercial property under their super fund.
However, SMSFs are highly regulated, with many compliance obligations. SMSF owners may consider a property purchased under their fund to form part of their retirement plan in more ways than one — however, living in a property owned by your SMSF isn’t as straightforward as some would presume.
In this article, we step you through some of the important information you need to know about living in your SMSF property in retirement.
Understanding the rules around SMSF property investment
The Australian Taxation Office (ATO) is primarily responsible for regulating SMSFs in Australia, however, the Australian Securities and Investments Commission (ASIC) also plays an important role in the superannuation industry, including self managed super funds.
Perhaps the most prominent rule regarding SMSF and property investments is the sole purpose test.
The sole purpose test
To maintain compliance with superannuation laws, SMSFs must meet the ‘sole purpose test’. This test requires the fund’s primary purpose is to provide retirement benefits to its members. What this means is that if you, a member of the fund or anyone else (either directly or indirectly) obtain a financial benefit from an investment decision made by the self-managed super fund (SMSF) trustees, then it is generally considered to be a contravention of the sole purpose test. Therefore, unfortunately, under the sole purpose test, purchasing a property with the intent to reside in it does not meet the condition for solely providing retirement benefits to the SMSF members.
Living in a residential property owned by your SMSF
If your SMSF purchases a residential property and rents that property to a related party of the fund, then that property would be considered an ‘in-house asset’. Under the super laws, SMSFs are only permitted to hold 5% of their total asset value in in-house assets. Consider the value of residential property in Australia — this means that your fund’s total value would need to be incredibly high in order to remain compliant with the in-house asset rules.
What is the penalty for living in an investment property owned by my SMSF?
Not only can your fund lose its tax concessions if you contravene the sole purpose test, but the SMSF trustees may also face civil and criminal penalties under Australian law. The use of SMSF properties for personal use is taken extremely seriously, making it crucial for SMSF trustees to ensure that their investment decisions align with their investment strategy and remain compliant with ATO and ASIC regulations.
Can I live in my SMSF property when I retire?
Believe it or not, you can actually live in an SMSF property once you retire, however, only under specific conditions.
Firstly, you must have arrived at the retirement phase by having reached your preservation age (meaning that you’re now legally allowed to access your superannuation benefits).
Secondly, the property must have passed the sole purpose test while your SMSF owned it, and;
Thirdly, the property must be correctly transferred into your personal name (therefore, no longer owned by the self managed super fund).
Do you pay stamp duty when transferring an SMSF property to an individual name?
Depending on the suitability and eligibility of the transfer, you may be able to in-specie transfer the property from the SMSF to your personal name, which may potentially reduce the stamp duty payable as costs related to the sale and purchase of the property. However, it’s important to note that in-specie transfers may not always be the most appropriate strategy and that stamp duty laws are subject to changes and vary between Australian states and territories.
Understandably, before moving into an SMSF property upon retirement, it is prudent to access professional advice to ensure that you safeguard yourself against financial detriment or penalties (and to make sure that it is the right move for you)!
Accessing the finance to buy property in an SMSF
If you want to purchase an SMSF investment property via borrowed funds, you’ll need to establish a Limited Recourse Borrowing Arrangement (LRBA). At SMSF Loan Experts, we are experienced in sourcing the correct lending structure and finance solution for each individual fund’s unique financial situation.
Chat with our team to learn more today.