Ever thought of investing your superannuation in real estate?
For most Australians, their superannuation is their second largest asset after their family home. Many would like to be able to include real estate in their superannuation investment portfolio.
You can invest in real estate directly through your own Self Managed Superannuation Fund (SMSF).
Is it permitted!
SMSFs must abide by the Superannuation Industry (Supervision) Act (SIS Act). An SMSF can invest in property as long as it is in line with the SMSF’s investment strategy. Investments can be made in both residential and commercial property.
A SMSF cannot purchase a residential property from a member of the fund or a relared party, and cannot lease the residential property to a member of the fund or a related party.
Commercial property can be purchased at market value from a member of the fund or related party and can be leased to a business related to a member on commercial terms. This is an attractive option for business owners which enables them to own the property from which they run their business.
Up until recently, an SMSF had to be able to afford the full purchase of the real estate,as the SMSF was restricted from borrowing to fund the purchase. This was the main obstacle for many. The changes now allow SMSFs to borrow to invest in real estate through a properly structured arrangement.
The borrowing rules
The new sub-section 67(4A) of the Superannuation Industry (Supervision) Act (SISA) will allow a SMSF to borrow, but any borrowing must be in accordance with an arrangement that has the following features:
- The borrowing is used to acquire an asset that is held in trust so that the superannuation fund trustee receives a beneficial interest and a right (but not an obligation) to acquire the legal ownership of the assets through the payment of instalments.
- The lender’s recourse against the superannuation fund trustee in the event of default on the borrowing and related fees, or the exercise of rights by the fund trustee, is limited to rights relating to the asset.
- The asset must be one that the superannuation fund trustee is permitted to acquire and hold directly (for example, a SMSF cannot acquire residential property from a member).
- Although the new sub-section allows superannuation funds to borrow, the borrowing must satisfy the conditions of the new section. The general prohibition on borrowing remains in force.
It is important to note that the borrowing arrangement by the SMSF must be properly structured. If you are looking to invest in real estate through your super fund we recommend you seek professional advice from one of our advisers.
The Australian Taxation Office has issued their view on instalment warrant type arrangements and noted some arrangements may not be acceptable. The link below provides information on this. We emphasize that professional advice is essential before borrowing to purchase a property inside your super fund.
ATO Alert - TA2008/05
ATO Information on Warrants and Super funds - ATO Q&A