If you are looking to invest your superannuation into direct property then there are two main types.
Business Real Property - is defined as meaning, any freehold or leasehold interest of the entity in real property, or any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer, where the real property is used wholly and exclusively in one or more businesses, but does not include any interest held in the capacity of a beneficiary of a trust estate.
Two basic conditions must therefore be satisfied before an SMSF or any other entity related to or dealing within an SMSF can be said to hold business real property:
- the SMSF or the other entity must hold an eligible interest in real property
- the underlying land must satisfy the business use test, which requires the real property to be used 'wholly and exclusively in one or more businesses' carried on by any entity.
For most SMSF this generally is used when a business owner’s SMSF buys the property, which they run their business out of. If this is you always make sure that there is a valid and arms length lease in place.
Residential Property – there is now a growing trend to purchase residential property (a rental property) in your SMSF. This is allowed as long as the Trustees and any related party do not benefit (use) from the property. As such holiday homes or family renting the property is not allowed, nor can you purchase the property from a related party.
If you are looking to buy property in the SMSF I strongly recommend that you only do so if you already have sufficient cash in the fund to do so, keeping in mind that the SMSF can hold the property as tenants in common owing a defined percentage of the property. If however you need to borrow to purchase the property then you will need a Bare Trust.
Bare Trust – a Bare Trust’s only purpose is to keep title over the investment property until the loan is paid off. This is to ensure that the other assets inside the SMSF are not put at risk in the case of the geared property investment losses money. The Bare Trust also is the entity, which holds the loan. The loan from the bank is required to be a “Limited Recourse Loan” which means that it can only sell the property in the case of a default on payment by the SMSF.
However the banks will normally require that the Trustee’s of the SMSF supply a guarantee for the loan. This means that the Trustee will be personally liable for any short fall on the loan and will therefore be placing their personal assets at risk. Once the loan is completed the title will go to the SMSF.
Trustees and members of a SMSF need to give careful consideration to the purchase of direct property into their SMSF as it comes with risks. You need to ensure that the property will provide sufficient liquidity to cover its expenses; proper leases are in place, that rental is at an arm’s length rate. That the property is not use for personal use either by a trustee or related party and that your investments strategy and trust deed allows for such an investment.
When it comes to retirement owing property in the SMSF will result in liquidity issues as generally the property will not generate enough income to cover the minimum pension payments as such it will need to be sold. Depending on the type of the property this can take some time. As such careful planning is required prior to making the decision to start a pension.
For information please contact us on 07 4771 4577.