Family self-managed super funds (SMSFs) have become increasingly popular for those seeking greater control over their retirement savings and the ability to invest in growth assets like property.
Owning property in a family SMSF requires thoughtful planning to keep the fund aligned with the family’s collective and individual retirement goals. In this article, we’ll explore considerations and strategies for managing a family SMSF that includes property.
Why Families Are Investing in Property through SMSFs
Family SMSFs often turn to property investment for its potential for long-term capital growth, tax benefits, and opportunities for intergenerational wealth transfer. Property assets may serve as a stable base for retirement savings, providing rental income and the possibility of gains if held for the right amount of time. Additionally, SMSFs enable family members to pool their resources, potentially enabling access to investment opportunities they might not afford individually.
Compliance Requirements of Property Inside Family SMSFs
To comply with the Superannuation Industry Supervision Act (SIS Act), property investments within an SMSF must meet specific regulations, including the sole purpose test. This means that the property must be purchased and held strictly for the purpose of providing retirement benefits to fund members — not for personal use. For families, this limitation could potentially be challenging, especially if one member wants to live in or use the property — which is not allowed.
SMSFs are also restricted from buying residential property from related parties. While commercial properties may be leased to related parties, such arrangements must adhere to market-rate conditions and other compliance rules.
Managing Family Goals and Investment Horizons
A family SMSF can include members across generations, each with different investment goals, timeframes, and risk tolerances. For example:
- – Older members nearing retirement may prefer liquidity and less risk, needing their retirement savings soon.
- – Younger members might favour a more aggressive investment strategy because of their longer investment horizon and minimal need for liquidity.
Balancing these differing goals is essential, and it’s important to plan for liquidity requirements if a fund member is approaching retirement and will need to draw a pension from the fund. If the property is the SMSF’s largest asset, selling it could disrupt the entire fund’s strategy. Creating a family SMSF investment strategy that includes clear guidelines on how long to hold property, and under what conditions it might be sold, can help align expectations and prevent conflicts.
Funding Family Property Investments in an SMSF
Purchasing property in an SMSF is a significant undertaking, and it’s not uncommon for family SMSFs to consider borrowing to fund such an investment. With limited recourse borrowing arrangements (LRBAs), an SMSF can take out a loan to acquire a property while limiting lender recourse only to the property itself — this means the lender cannot touch the fund’s other existing assets in the event that the SMSF loan defaults.
Is a Family SMSF Property Investment Right for Your Family?
Investing in property through a family SMSF requires consideration, clear communication, and professional advice to balance the goals of family members. By planning for life events and establishing clear investment guidelines, families may maximise the benefits of holding property within an SMSF, building a shared asset that serves both current and future generations.
If you’re considering purchasing property inside your family SMSF, we’d love to help you with the finance side. At SMSF Loan Experts, we specialise in helping SMSF members access SMSF loans to purchase investment property inside super. To learn more, please get in touch with us today.
