SMSF’s and Property Development
Don’t Shipwreck on the Reef! Obstacles to look out for in the world of SMSF’s and Property Development.
With such a low interest environment, more and more SMSF trustees are looking for opportunities for an increased return on their superannuation and are considering property to be a safe and reliable option. The benefits are that it is tangible, can have tax benefits, and can provide a good income along with strong capital growth. 

However, such an investment is not straight forward and can be likened to the idea of navigating a reef with many obstacles, quickly resulting in wreckage due to unforeseen circumstances and in turn breach various regulations. It is important that as Trustee, you are aware of your responsibilities when navigating through the detail to avoid the consequences of non-compliance. 

Like all SMSF investments, the ‘sole purpose test’ must be kept at front of mind, which requires that a superannuation fund, including an SMSF, must be run for the sole purpose of providing retirement income. Any arrangement that works against this purpose will most likely result in a breach which can prove to be very costly to unravel, including penalties, the sale of assets in breach, closure of your SMSF, and more.

Common structures for SMSF’s and property development and their investment boundaries include, but are not limited to the following: 

SMSF’s Direct Investment in Residential Property – 

  • The purchase and any establishment materials cannot be obtained from a related party 
  • Property cannot be lived in by a member, or related party to a member 
  • The property must be unencumbered, unless a formal LRBA (limited recourse borrowing arrangement) is obtained.

SMSF’s Direct Investment in Commercial or Industrial Property (Business Real Property) – 

  • Can be purchased from, and rented by a related if it is at market rates.
  • Materials for establishment cannot be purchased from a related party 
  • The property must be unencumbered, unless a formal LRBA (limited recourse borrowing arrangement) is obtained.

It is possible for an SMSF to enter into a borrowing arrangement to assist with the shortfall of cash. This can be achieved by a LRBA which has a number of complexities to be wary of, including but not limited to the ‘single acquirable asset rule’ whereby the asset must be held in a separate entity, limiting recourse on the loan to that particular asset. For example, you can borrow to purchase land, however you cannot use the borrowed money to build a house on the land. This type of borrowing can also be more expensive and require a higher than usual deposit. 

SMSF’s Investment in a Related Party Unit Trust – 

  • This is a commonly used structure where an SMSF alone has insufficient funds to acquire a property and can involve unit holders that aren’t SMSF’s.
  • The trustee of the unit trust cannot be party to a lease with a related party (unless the asset is business real property)
  • The assets of the unit trust cannot include an interest in another entity, such as shares in a company.
  • The assets of the unit trust cannot include a loan to another entity, unless the loan is with an authorised deposit taking institution.
  • The unit trust can’t borrow and the assets of the unit trust cannot include an asset that has a charge over it.

    Investing in property through super is not advisable for  everyone, so if you are entering into or considering the purchase or development of property within your SMSF, you should be cautious and ensure that you understand initially and also progressively the limitations of the investment. What seems to be a sound structure to start with can quickly change its course if compliance is not given the required attention. If you are still unsure as to your compliance obligations, reach out to your financial adviser or accountant to help guide you in the right direction.

Please note that this is factual and general advice only, and is not personally applicable to your circumstances or needs.