News & Information

Property Investments and Your SMSF

July 03, 2018

As a trustee of an SMSF you are given the opportunity to invest in property, which is one of the biggest advantages an SMSF has over a traditional superannuation fund.  Directly held investments make up approximately 19% of all SMSF assets indicating that trustee’s consider property investment an important part of their portfolio.  While there are a number of ways and strategies for property to form part of an SMSF’s, it is critical to do your research and give serious though to your investment strategy.

Before you make any investments you must first have an investment strategy, which is in fact a legal requirement for all trustees of an SMSF wishing to invest.  Your strategy should clearly state the fund’s investment objective and the specific types of investments your fund is able to make. It should also detail the diversification of the fund, the liquidity of the funds assets and the fund’s ability to pay benefits (when a member retires) and other costs that may incur.

Direct property investment has always been a common form of property exposure for SMSF holders.  While it is strictly forbidden to invest in your family home or holiday home for your personal use you are able to invest in other commercial and residential properties.  When considering such investments you should examine your asset allocation, diversification, the potential rental income and property expenses, how close you are to retirement and the need for liquid assets to be able to pay out pensions. It is important to note that parties cannot live in the property.  If the property is a business real property (BRP) you may be able to work from the premises, however the property must satisfy the sole purpose test.  According to the ATO, in order to meet the sole purposes test “your fund needs to be maintained for the sole purposes of providing retirement benefits to your member’s, or to their dependants if a member dies before retirement”.

SMSF’s may also invest in property by borrowing money under the Limited Recourse Borrowing Arrangement (LRBA).  The LRBA allows SMSF trustees to indirectly borrow money from their SMSF to finance super fund investments, including direct property. In order to do so an SMSF trustee must take out a loan form a third party lender, which can then be used to purchase a single asset such as a residential or commercial property which is to be held in trust.  SMSF borrowing under the LRBA can be quite complex and should only be considered if your SMSF can withstand the risk.  The underlying investment, the diversification of the fund to meet long-term investment objectives and the set-up costs and structures should all be considered.  A LRBA can be quite costly and you need to evaluate if your SMSF can withstand the prolonged loan repayments.  The strict borrowing laws outlined under superannuation law also need to be considered. 

Indirect investments may be another way for your SMSF to gain property exposure without having to actually purchase a property.  These investments are less complex and do not require a large amount of capital; they introduce your SMSF to large value properties which may have otherwise been out of reach.   Indirect investments can include listed investment companies and exchange traded funds as well as managed investments trusts.

Any investment choices should be accompanied by the advice of an SMSF specialist.  LifeTime Financial Group are specialists (holding appropriate accreditations) advisors who are ideally positioned to assist you. Anthony Stedman and Adam Watts both hold specialist accreditations with SPAA as specialist Self-Managed Superannuation planners.