Purchasing a residential investment property through your Self-Managed Superannuation Fund (SMSF) comes with a set of stringent regulations to prevent conflicts of interest and ensure compliance with the law. Here are some key points to keep in mind:
Ownership Restrictions: You are prohibited from acquiring a residential investment property owned by yourself, relatives, or entities controlled by you or your relatives. Attempting to manoeuvre around these rules can lead to severe consequences under Section 66 of the SIS Act.
Strictly No Personal Use: Your SMSF-owned residential property cannot be used for personal purposes, including renting it to relatives, even at market rates. Using the property or any part of it for personal storage is also considered a breach.
Beach House Dilemma: The rules apply equally to beach houses. Staying or utilising the property in any personal capacity is strictly forbidden. Trustees can only stay temporarily for maintenance purposes, raising concerns if such activities coincide with holidays.
Investment Property Classification: Merely owning multiple investment properties doesn't automatically mean that you are running a business. The Australian Taxation Office (ATO) has specific criteria, and passive rent collection is unlikely to meet the requirements.
Limited Recourse Borrowing Arrangement (LRBA) Considerations: If you plan to use borrowing to build your SMSF property portfolio, remember that cross-collateralisation is not allowed. Each property must have its own separate bare trust and loan arrangement.
Restrictions on Changing Asset Character: When using an LRBA, the character of the acquired asset cannot be altered. This means no subdivision, construction on vacant land, demolishing to rebuild, or converting a house into a different type of property. Any such changes are not permissible.
Complex Nature of Property Investment: Property investment within an SMSF is intricate, and considerations for property development and joint ventures add further complexity. The Australian Taxation Office has expressed concerns about certain arrangements in Taxpayer Alert TA2023/2.
Seek Professional Advice: Regardless of your experience in property investment, managing retirement savings through an SMSF requires careful navigation. It is strongly advised that you consult with an experienced finance professional before embarking on property investment through your SMSF.
