The growth in investors using self managed super funds (SMSF) to make property purchases has been nothing short of explosive over recent years. While there are no current statistics available already in 2013 SMSF’s held approximately $70 billion of real property. And most recently the regional director of accountancy firm H & R Block Frank Bass, told SMSF Adviser that he believes the ATO will be targeting SMSF investors in 2014.
For Property Managers, it is important to be aware of the legislation around SMSF property investment, whilst also being careful not to offer either legal, financial or accounting advise to landlords.
There are four simple rules governing a property purchased via an SMSF. Firstly, the property must meet the “sole purpose” test – namely, it must be acquired solely for the purpose of providing retirement benefits from a fund member/s. Secondly it must not be acquired from a related party of a fund member. Thirdly, it must not be lived in by a fund member or a related party to any of the fund members and lastly it must not be rented by a fund member or related party.
The only exception to these rules applies to business owners, who may be able to purchase their business premised through a SMSF and have their business as the tenant. In this case, the member will need to prove they are paying market rent for real property, including a written lease and supporting letter from a local real estate agent who is knowledgeable about the area.
Bass says there are several common traps SMSF investors need to avoid. The main area is mixing up SMSF and personal finances – the rental income related to a property held in an SMSF must be kept separate and expenses must be covered by the fund itself. Another area to note is that if a property is acquired under a Limited Recourse Borrowing Arrangement, the SMSF is required to hold the same property, which may limit any work the landlord could do on the property outside of normal repairs and maintenance to increase its value.
As always landlords are advised to seek professional advise around all legal and investment issues.