You can invest in properties with your SMSF. However, there are some limitations to what you can do.
Purchasing property from a related party
An SMSF is generally not permitted to purchase residential properties from a related party. The only assets that an SMSF can purchase from a related party are commercial properties and listed shares. For a Q&A on property examples in an SMSF, follow this link to the ATO guidance document:
If Trustees are going to purchase a commercial property from themselves, it is important to ensure that the transaction takes place at arm’s length and on commercial terms. The property must be valued at market value by a professional valuer or the Trustees of the Fund. If Trustees would like to undertake the valuation themselves, the market value should be determined based on objective and supportable data. The ATO has provided some guidance on who can undertake an asset valuation. To access the ATO’s guidance, please click on the button below:
Selling property to a related party
Although there are stringent rules when it comes to purchasing assets from a related party, the SMSF Legislations are much more lenient when it comes to transferring a property from an SMSF to a related party. The SIS Act and Regulations do not prohibit the sale of any property by the Fund to a related party of the SMSF.
In addition, the Super Fund does not need to value the property when selling it to a related party, although the transfer still has to occur on an arm’s length basis. Similarly, when disposing the property to an unrelated party, property valuation is also not required. To access the ATO’s guidance on asset valuation in an SMSF, please click on the button below:
Tenants in common
An SMSF can invest in property directly with a related party under a tenants in common arrangement.
When entering into a tenants in common arrangement, an SMSF will own part of the property with a related party, such as the Members of the Fund. Any income or expenses incurred by the owners of the property will be apportioned in accordance with the percentage ownership. A statement of income and expenditure should therefore be prepared each year to calculate the net income to be allocated to each part owner of the property.
It is an ATO requirement for all assets held by the Fund to be under the name of the SMSF. If the property is purchased through a tenants in common arrangement, it is important that both the names of the related party as well as the SMSF should be noted on the contract of sale. For more information on asset ownership, please click on the button below:
One advantage of the tenants in common arrangement is that the parties involved can take out a loan to finance the investment. For more information on borrowing to invest, please see here.
An alternative may be to use a section 13.22C unit trust, which allows the acquisition of additional units by the SMSF. The SMSF can therefore increase its unit holding and percentage ownership. For more information on the section 13.22C unit trusts, please click on the button below:
