Many people are drawn to owning property as it is an asset class that we can physically see and are all familiar with. Many people look to establish an SMSF purely to purchase a residential property. Whilst there are many advantages to holding a property in an SMSF including, accessing a pool of money you can’t normally touch and the lower rate of tax payable on income and capital gains. The downside is that the superannuation environment is heavily regulated and there are a number of rules which trustees need to be mind full of.
Firstly are the restrictions on acquisition. You cannot purchase a residential property from yourself, your relatives, family companies or family trusts regardless of whether it is purchased on commercial terms at market value.
Secondly are the restrictions on use. A residential property cannot be used by yourself, or anyone related to you including private companies and trusts even if commercial rates of rent are being paid. Even in retirement this still applies. If a related party wants to use the property, it must first be transferred out as a benefit payment.
Thirdly involves the valuation of the property. The legislation governing an SMSF requires that all assets are recorded at market value. This implies that trustees of the fund will need to be responsible for ensuring that they provide a market value of the property to their accountant each year. This can be done by an online property valuation service, a real estate agent or even the trustees themselves. Consideration needs to be given to the value of similar properties in the area and what like properties have been sold for. Consideration should also be given to whether there have been improvements made since the last valuation.
In addition to the above care should be taken when signing contracts that the correct name is being reflected. If there is a borrowing involved the name on the contract may vary depending on which state the property is in. Recording assets in the wrong name can not only have adverse consequences on the fund but can also result in the payment of double stamp duty to correct the error. If in doubt seek expert advice!