Article by Paul McKenzie
As superannuation payments since the 1990s is compulsory in Australia and in recent years, a growing trend towards self-managed superannuation funds. Working Australians are working hard and smart on their superannuation savings, building up wealth and investment returns in their self-managed superannuation funds (SMSFs). There are stringent rules and regulations for SMSFs, heavily regulated and compliances, governed by the Australian Taxation Office (ATO).
Property is a popular class of investment for Australians and as such, keen to put their superannuation money into property, with the property when purchased, going into their SMSFs. This is not as simple as easy as it reads. There are many rules and regulations about property in SMSFs, that keeps changing.
You can only buy property through your SMSF if you comply with the rules, which at this current stage, is that the property looking to buy, for investment purposes with your SMSF –
- Must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- Must not be acquired from a related party of a member
- Must not be lived in by a fund member or any fund members’ related parties
- Must not be rented by a fund member or any fund members’ related parties.
First of all, you need to assess, from taxation and tax benefits, what is better for you ? The property as an investment directly in your name ?, or property as an investment into your SMSF ?
Your tax accountant can advise you on your circumstances, with taxation and tax benefit considerations, such as capital gains tax, negative gearing for direct investments, property related expenses, such as repairs, maintenance, council rates, water rates and strata levies. Legal fees, stamp duty, ongoing property management fees and bank fees. Consultant fees, which if relates to property in a SMSF, must have a financial services licence. An consultant, such as an architect, unlikely to have a
financial services licence, and such an expense, with your tax accountant’s advice, may not able to be paid out of your SMSF.
Word of warning if you are looking to put your own home into your SMSF, you cannot become your own tenant, as per the above rules. Furthermore, you can lose your principal place of residence exempt, with annual land tax assessments, by the state’s revenue authority. This is where your tax accountant needs to advise you, if there is a risk of losing your principal place of residence status on land tax, together losing the benefit of negative gearing, if placing your home into your SMSF.
Another crucial consideration – home loans. In the past, with SMSF and lending rules, you could not get a home investment loan, if the property is going into a SMSF. Only in recent years, there are loan products out there, in the market place, with very strict borrowing conditions and often called a “limited recourse borrowing arrangement or facility. A limited recourse borrowing facility can only be used to purchase a single asset, and usually for the mature SMSF investor, who has a good banking relationship manager, who is able to get such a product for their client.
Also, on limited recourse borrowing facilities, there are mostly for residential and existing properties only. The rules do allow for some classes of commercial property, but prevents properties under construction, or “Off the Plan”.
Home and land packages becomes harder for SMSF considerations. The rules would allow a residential vacant lot bought outright (with no loan or mortgage) going into a SMSF, with annual valuations by the SMSF, to keep track of value with SMSF tax returns. However, construction with construction finance, would not apply with the SMSF rules, unless the construction loan, is a limited recourse borrowing arrangement or facility.
Finally, under New South Wales property/conveyancing laws, with the Land titles Office (now called the NSW Land Registry Services). Conveyancing transfer, only going into the names of their trustees, and not in the name of the trust itself. The prove the property is in a trust or SMSF, you must have the relevant details on the Contract front page (for example, the purchaser being John Adam Smith, ATF The John Adam Smith Self-Managed Super Fund, ABN 11 123 456 789) and keep all the paperwork together as evidence.
To protect the property asset inside your SMSF, under the Australian Superannuation legislation, you can at the Land Titles Office, place a SMSF protection caveat on the property. There are costs involved and the Land Titles Office would require the SMSF’s Trust Deed to be examined by Revenue New South Wales, which some SMSF Trust Deeds, would require stamp duty paid on it.
Written by Paul McKenzie – CEO of ABS Conveyancing & Valuations, in Sydney & Melbourne. He is on the management committee for the Australian Institute of Conveyancers NSW and the Sydney CBD Chamber of Commerce. Paul is also a member of the Australian Property Institute and the Australian Indian Chamber of Commerce NSW. He is a property writer, guest speak on conveyancing and has made guest appearances on radio. Paul has done immigration law studies at the Australian National University (ANU), a law graduate from Macquarie University, a Professional Certificate in Property Law from Sydney University and Bachelor of Commerce in Land Economy/Property Valuation from Western Sydney University Hawkesbury.
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