Ask the expert: Investment properties and SMSFs

Super Living: Ask the expert: Investment properties and SMSFs MY husband and I are starting our own SMSF. His portion has about $650,000 in it. He has also put a deposit from savings onto an “off the plan” apartment that he will rent out and negative gear. It settles in 12 months and the total purchase price is $1.1 million. Can he actually pay for 50% from the SMSF and own 50% himself, just negative gearing his half as he will borrow money for it? That way, half is owned by his super fund and half by him. Answer this week provided by James Gerrard, a certified financial planner with PSK Financial Services. One of the key advantages of using a self managed superannuation fund is the ability to hold a diverse range of investments. Residential property is one such investment. An SMSF is also able to jointly own assets with members of the fund, allowing a member of an SMSF (acting in their own personal capacity) and the SMSF itself to pool resources and jointly purchase investment assets. The SMSF should document why it was appropriate to go down the path of a joint venture investment. The document should include points such as:

• • Is this strategy in line with the SMSF investment strategy;

• • The risk of making the investment;

• • Effect on the diversification of the SMSF;

• • Impacts on cash flow and liquidity of the SMSF;

• The SMSF’s ability to discharge any liabilities.

Caution needs to be taken to ensure that the “sole purpose” test is met when an SMSF enters into a property transaction. The sole purpose test from section 62 of the Superannuation Industry (Supervision) Act 1993 states that the primary purpose of a superannuation fund is to provide retirement benefits for members. As such, purchasing a property as a holiday house via an SMSF is not permitted. The SMSF must enter into joint property purchases on an arm’s length basis. Any discrepancies, discounts or overestimations will be viewed negatively by the ATO. An SMSF also cannot purchase an existing residential property owned by a member of the SMSF unless it is “real business property” such as a commercial property. The “in-house assets” rule also needs to be taken into account. Unless an exclusion applies, all “in-house assets” of an SMSF cannot exceed more than 5% of the SMSF total balance. An in-house asset is a loan, investment in or lease agreement between the SMSF and a related party. Related parties include fund members and their relatives. Therefore an SMSF cannot rent a property it owns to a related party of the SMSF as the property would be deemed an in-house asset. The two mains exclusions to this are where the property represents less than 5% of the total SMSF assets or if the property is a commercial property where the “business real property” exclusion applies and a related party can rent the property on commercial terms. In summary, the strategy to purchase property between an SMSF and individuals can be effective where:

• • the trustee of the SMSF does not want the SMSF to borrow money to invest;

• • the only way to afford the asset purchase is to pool resources between the SMSF and individual members; and

• the member of the SMSF cannot contribute enough money into the SMSF due to the contributions cap to allow the SMSF to buy the property outright.

Care should be taken to ensure that superannuation rules are not breached and specialist advice is highly recommended when thinking about buying property in super. James Gerrard can be contacted at james@psk.com.au or (02) 9324 8888.