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Self-Managed Super Funds ('SMSF')

Updated: Aug 4, 2021

What is an SMSF?

An SMSF is a private superannuation fund you manage yourself, regulated by the Australian Taxation Office. SMSFs are different from mainstream funds regulated by the Australian Prudential Regulation Authority (APRA) which pool members’ savings and invest the money for them. SMSFs can have up to four members. All members must be trustees (or directors if there is a corporate trustee) and are responsible for decisions made about the fund. If you have an SMSF, you are responsible for managing it and complying with all relevant laws.

Self-managed super fund property rules

You can only buy property through your SMSF if you comply with the rules.

The property must:

  • meet the 'sole purpose test' of solely providing retirement benefits to fund members

  • not be acquired from a related party of a member

  • not be lived in by a fund member or any fund members' related parties

  • not be rented by a fund member or any fund members' related parties

If your SMSF purchases a commercial premise, it can be leased to a fund member for their business. However, it must be leased at the market rate and follow specific rules.

SMSF property sales may have many fees and charges. These fees can add up and will reduce your super balance. Find out all the costs before signing up.

SMSF borrowing

SMSF home loans are more complex than regular home loans, as any property purchased must be for the sole benefit of the SMSF, not the individual trustees.

The property must also provide a market return, that will be used to benefit the super fund members when they reach the retirement age of 65.

While you can both borrow and loan money from an SMSF for the purpose of buying property, there are many restrictions, regulations and conditions that you must meet to ensure that the purchase is legal. If the purchase is not legal as per the Australian Taxation Office (ATO) guidelines, you may risk losing half of the assets in your SMSF, and face thousands of dollars in fines.

Borrowing or gearing your super into property involves very strict borrowing conditions. It is called a 'limited recourse borrowing arrangement'. You can only purchase a single asset with a limited recourse borrowing arrangement. For example, a residential or commercial property. You should assess whether the investment is consistent with the investment strategy and risk profile of the fund.

Geared SMSF property risks include:

  • Higher costs – SMSF property loans tend to be more costly than other property loans.

  • Cash flow – Loan repayments must come from your SMSF. Your fund must always have sufficient liquidity or cash flow to meet the loan repayments.

  • Hard to cancel – If your SMSF property loan documents and contract are not set up correctly, you can't unwind the arrangement. You may have to sell the property, potentially causing substantial losses to the SMSF.

  • Possible tax losses – You cannot offset tax losses from the property against your taxable income outside the fund.

  • No alterations to the property – You cannot make alterations that change the character of the property until you pay off the SMSF property loan.

Property developers and SMSFs

Property developers must have an AFS Licence to provide financial planning advice. This includes advice on setting up an SMSF.

Property developers may have a pre-existing business relationship with the professionals they recommended. They may receive a referral fee or other benefits that could amount to thousands of dollars.

Do not be pressured into making property purchase decisions for an SMSF. Watch out for sales tactics like competitions, free flights to sales meetings or being taken out for free meals.

It is always important to do your own research first and obtain independent legal and financial advice before making any decision regarding an SMSF or making a property purchase with your SMSF.

Speak to your mortgage broker today about self-managed super funds.

Kind Regards,

The Newstead Group Team

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