Your investment options for direct property investment under your self-managed super fund (SMSF) have expanded in recent years, thanks to the introduction of specialist disability accommodation (SDA). Specialist Disability Accommodation is a revolutionary introduction under the National Disability Insurance Scheme (NDIS), designed to support members of the community with extreme functional impairment or very high support needs.
If you’re curious as to how an SDA property could diversify your SMSF investment portfolio, or how it differs from a regular property, we explain the differences below.
How is SDA different to residential property?
SDA properties may seem like traditional residential properties from the outside, but they are revolutionary on the inside. An SDA dwelling is built to precise specifications under the SDA design standard, across four design categories:
2) Improved liveability
3) Fully accessible
4) High physical support
Each design category has been specially formed to support the needs of different disability types. For example, a high physical support home is built with ceiling hoists for transferring tenants in and out of bed, as well as grab rails throughout the bathroom and home automation such as communication technologies.
A fully accessible home, on the other hand, has features to support people who have physical challenges. Every doorway and hallway is wider than standard, wheelchair accessible and has adjustable benchtop heights.
SDA as an investment property
In terms of an investment property, an SDA property generally rivals the best residential or commercial property options.
Commercial real estate, in particular, is renown for its high income yield — but SDA investment properties frequently return between 10-15% pa thanks to funding by the federal government. The government is contributing up to $700M per year towards SDA funding, meaning that you can access above-market rate rent, and rival the rental returns from a commercial premises.
Even if some of your members have shifted into pension phase, the strong income yield from SDA properties can help support the income needs of any members in your self-managed superannuation fund.
Capital appreciation potential
SDA properties hold strong capital growth potential, thanks to such a strong, ongoing demand for specialised housing under the NDIS. Self-managed super funds that purchase residential or commercial property, usually do so to benefit their members in the long term. An SDA property value has the same (if not more) potential to appreciate in value compared to regular property.
Without appropriate housing, people with disability often find themselves in nursing homes prematurely, or shifting between group homes and other inadequate accommodation. Specialist Disability Accommodation is the first of its kind in Australia and not only provides accommodation, but forever homes for NDIS participants.
On top of accommodation that supports the needs of its tenants, SDA properties also improve the quality of life for those that call them home, providing the opportunity for a greater level of independence, socialisation and better access to NDIS service supports.
Key things to remember when buying property in your self-managed super fund
There are a number of rules and regulations to bear in mind when purchasing property through an SMSF. Self-managed super funds are regulated by the Australian Taxation Office, however, many pieces of legislation govern how SMSFs operate. Before making the choice to invest in a self-managed super fund, it’s a prudent decision to seek professional advice.
Update your investment strategy
Your trust deed must allow for the property loans or the purchase of property within your SMSF, and resultantly, you must update your investment strategy to reflect direct property ownership.
Meet sole purpose test
The purchase of any property within your SMSF needs to remain compliant with the sole purpose test. All decisions and actions of the SMSF trustees must be made around solely providing retirement benefits to its members.
Failing to comply with the sole purpose test can not only jeopardise your retirement savings, but there can be civil and criminal penalties that apply.
You may not need to be reminded of the tax advantages and potential tax benefits of investing within the superannuation environment, however, remember that there are also tax consequences, such as capital gains tax liability (CGT).
Not many super funds have the available cash to buy property outright, and opt to use SMSF loans. If you do so, most lenders will only allow you to borrow a certain percentage of the property value; meaning that the fund will need to cover other costs such as legal fees or stamp duty.
Also, any interest payments, ongoing property management fees, insurance premiums and other property expenses need to be covered using the super fund’s cash. Also, all the income generated from the property (such as the rental income) must go through the super fund’s bank account.
Strict rules with who you can have as tenants
Property purchased inside your own super fund can’t be rented to related parties of any fund members. A related party is essentially someone that has a personal relationship with any of the fund members. This applies regardless of whether the property is a residential or SDA property.
In the case of commercial properties, you can lease the property to your own business. The rent must be at market rates, and all leases must be made under standard commercial agreements.
There are very strict borrowing conditions when you borrow money to invest within an SMSF. A limited recourse borrowing arrangement (LRBA) needs to be established if you’re looking at purchasing property within the fund. An LRBA is a separate property trust to limit the recourse for the lender, in the event that the SMSF defaults on the loan — meaning that the fund’s remaining assets aren’t put at risk.
Before you purchase property through an SMSF, make sure that you have the correct lending structure. At SMSF Loan Experts, we are experienced in assisting SMSF trustees to correctly structure their borrowing solution.
Contact the team to make an SMSF property a reality for your fund.