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SMSF investing in real property

Ever thought of investing your superannuation in real estate?

For most Australian, 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). A SMSF can invest in property as long as it is inline 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 to own the property that they run their business from.

Up until recently, unless a SMSF can afford the full purchase of the real estate, 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

Note: new provisions section 67A and 67B were introduced to replace sub-section 67(4A), that took effect from 7 July 2010. The update is available here.

The new sub-sections 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:

Although the new sub-section allows superannuation fund 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.

More information

Download our guide SMSF Real Property with Borrowing Booklet for more information or our in-depth article SMSF borrowing rules examined for a discussion on the borrowing rules and ATO draft ruling.

Useful resources

The Australian Taxation Office has issued their view on SMSF borrowing arrangement (instalment warrant type arrangement).

ATO Draft Self Managed Superannuation Funds Ruling - SMSFR 2011/D1

ATO Q & A - Limited recourse borrowing arrangements by self-managed super funds - questions and answers

ATO Alert - TA 2008/5

Instalment warrants and super funds - ATO questions and answers (Superseded)

We can help

If you are looking to investment in real property with borrowing in a SMSF, we can assit you to set up the structure. Please contact us to discuss further. Our contact details.