Using superannuation to buy property

Can I buy an investment property through a self-managed super fund?

Yes, although it's often not as simple as people think.

Colin Lewis, the head of technical services with IPAC Securities, says the most common question he is asked when it comes to DIY super is whether you can put an existing investment property into the fund. 

The simple answer is no.

Whether you're planning on selling the property to the fund, or transferring it across as a personal super contribution, it will be caught by regulations preventing super funds from acquiring assets from fund members.

Lewis says the only acquisitions from members that are allowed are shares, managed funds, and the property used as your business premises.

Can I use the money in my fund to buy an investment property from someone else?

As long as it's not a related party, yes. (Purchases from related parties are regarded as in-house assets and can't make up more than 5 per cent of the fund.)

However, the super fund can't borrow to buy the property, as this is also prohibited under the super legislation.

And few funds have the dosh required to buy a property outright.

Can't I buy it with the fund?

You can if the ownership is structured correctly.

If the fund had $100,000 in cash, and you had $400,000, you could buy a $500,000 property as tenants in common, with the ownership split (20 per cent for the fund, 80 per cent for you) recorded on the title deed.

Or you could set up a unit trust to hold the property with the fund owning 20 per cent of the units and you owning the rest.

As long as the trust is ungeared (that is, it has no borrowings) it is not caught by the in-house asset rules.

Can I borrow to buy my share of the property?

You can't use property owned by a super fund as security on a loan.

Up to 1999, super fund members were able to borrow through the unit trust, but this has now been prohibited.

If you want to borrow your share you can do so, but you'll have to use something else as security for the loan.

Most commonly, people borrow against their home.

What if I want to use the future income in my super fund to increase its share of the property?

Again, you'll run into problems, because this is regarded as the fund acquiring an asset from its members.

As a general rule, once the ownership split is set, it is fixed.

Lewis says some promoters are pushing aggressive schemes that suggest otherwise, but these are likely to breach the regulations.

Can I rent the property myself or rent it to my children?

You can't rent it yourself, and if you rent it to a related party it will be caught by the in-house assets rule.

A further consideration is whether holding most of the fund's assets in one investment property is in line with its formal investment strategy.

Your Investment Strategy

You get a knock at the door. They flash their badge. It is the ATO coming to “help” you with your Self Managed Super Fund. The first thing they look at is your Investment Strategy.

Is it up to date? Is it complying with all the latest rules for this year?

What is an Investment Strategy?

It is a strategy which is aimed at the investments of the Self Managed Super Fund to achieve a desired outcome and a minimum level of performance.

It is a plan for making, holding and realising the Fund’s assets consistent with the Investment Objective of the Fund.

Why does my Fund need an Investment Strategy?

Under the Superannuation Industry (Supervision) Act 1993 (“SIS Act”) the Trustee of the SMSF is solely responsible and directly accountable for the management of the members’ benefits.

The trustee has a duty to make, carry out and document decisions about investing the assets of the fund and to carefully monitor their performance. This duty involves formulating and implementing an investment strategy. This important duty is prescribed in the SIS Act as a covenant (an obligation of the trustee).

The investment strategy must have regard to the whole of the circumstances of the Super Fund, including:

(i) the risk involved in making, holding and realising the SMSF's investments, and the likely return from these investments, having regard to the SMSF’s objectives and its expected cash flow requirements;

(ii) the composition of the SMSF's investments as a whole, including the extent to which the investments are diverse or involve the entity in being exposed to risks from insufficient diversification;

(iii) the liquidity of the entity's investments having regard to its expected cash flow requirements, for example: payment of tax, superannuation surcharge liability of the members, lump sum benefits if a member leaves the SMSF, or regular pension payments;

(iv) the ability of the SMSF to discharge its existing and prospective liabilities.

The purpose of this obligation is:

• to protect the members’ retirement benefits;

• to minimise the risk of irresponsible or incompetent investments; and

• to ensure investments are made in accordance with the sole purpose and investment provisions of the SIS Act.

Under this approach to managing the investments, the Trustee should implement a due diligence process promoting well thought-out and responsible decision making.

This also protects the Trustee from action by members if the investments turn out to be disastrous.

WARNING

If you don't have a valid and complying "investment strategy" then the ATO may state that your self managed super fund is non-complying.

Law Central provides an excellent on-line interactive solution to creating a complying investment strategy for your SMSF.

Their step-by-step on-line document building process makes the job easy (it takes less than 1 minute) ... and at only $55 it just may be the best investment that your SMSF may make!

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Disclaimer: The information contained above has been provided as a general service. Any references to specific financial, legal, accounting, or taxation issues are done so in the context of general information and should not be relied upon as fact or construed as advice by the us in any of these areas. You should consult a relevant financial, legal, tax or accounting professional to assist in your particular circumstance.