The main benefit of establishing an SMSF is typically having more control over your super. However, this also comes with a strict set of obligations and responsibilities and the need to exhibit self-discipline. These qualities become much more crucial if you consider using your SMSF on property investment. One very harsh law that is sometimes misunderstood or not known is that if you buy a home through your SMSF, you are not allowed to live there, nor can any of your relatives, even if they pay market-based rent.
However, as long as it’s done on a commercial arms-length basis, you or a person connected to you can lease commercial or corporate space. Small business owners will find this proposal especially appealing. Your SMSF may buy a location where you can operate your business while paying the super fund rent.
Is it a good idea to buy a house through an SMSF if you’re close to retirement?
If you are trying to broaden the asset allocation in your portfolios and the property merely comprises one of a broad asset mix, buying a property through an SMSF is a good idea. However, it is not a good idea if you are getting close to retirement.
The entire purpose of superannuation is to accumulate a pool of assets that will support your standard of living throughout retirement. Once you retire, you will need to begin drawing from this pool.
Additionally, suppose your SMSF is providing you with a pension in retirement. If that’s the case, you should ensure that the fund’s assets can produce enough cash flow to meet the legal requirement of paying an annual minimum pension of at least 4% of the fund’s pension assets value.
Can anyone purchase property abroad using SMSF?
Yes, your SMSF can purchase property abroad, to give a quick answer. Of course, this presumes that your trust agreement for your SMSF permits it and that your investment strategy for your SMSF has made particular provisions for such investments.
The biggest challenge for an SMSF purchasing property abroad is that many nations restrict foreign property buyers, mainly when the buyer is not a natural citizen.
For instance, SMSFs can only purchase real estate in certain US jurisdictions through a US limited liability business. The SMSF might need to open an overseas bank account for the receipts and payments for the rentals.
What will happen if you decide to sell the property?
The standard transaction procedures for sale, such as a contract, deposit, adjustments for outgoing expenses, settlement, etc., should be followed when you intend to sell the property. While this is typically assumed if the buyer is a separate third party, it is crucial to act in the same way if the property is sold to a family member of the person owning the SMSF.
In addition to those above, the trustee must ensure that the property is sold at the market rate to prevent compliance issues or adverse tax consequences.
The property may be sold to a third party without notifying the SMSF trustee if a holding (bare) trustee holds it under a flexible rate borrowing agreement. To represent the vesting of the holding trust arrangement, the necessary compliance paperwork must be completed.
Conclusion
Imagine that you run a tiny firm. If so, your superannuation assets are not considered when determining whether you qualify for the advantageous small business CGT reductions that apply when you sell your business or retire. So, if chosen carefully, SMSF property investment might be highly beneficial. Making a plan in advance will boost your ability to receive these concessions.
