You may be able to use flexible purchase options.
ONE of the changes to superannuation in the last months of the Howard government was allowing self-managed super funds to borrow to buy property.
There are restrictions on how it can be done, but it does mean that an SMSF can buy property without having the funds to pay the entire cost.
QI am 47 and work for the Government. If I resign I am due a reasonable payout, most of which is preserved. Can I gain access to this money and purchase an investment property instead of leaving it in shares? Would my super fund be able to borrow to purchase a more expensive property?
AAs you are under preservation age you will not be able to access your superannuation funds for an investment outside of superannuation. But you will, however, be able to roll your superannuation into an SMSF and use the funds to buy an investment property. In addition, as long as all the various conditions are met, your fund could borrow to purchase a more expensive property.
Those conditions are:
The borrowing must be for the purchase of an asset the trustee of the super fund is allowed to purchase.
The asset purchased with borrowings must be held by a trust.
The loan taken out must be a non-recourse loan.
The super fund must make one or more payments to the trust before it can become the owner of the asset.
Basically, these restrictions mean the SMSF can borrow to buy a property if it is allowed by the investment strategy of the fund, it is not purchased from you, the loan taken out has the property as its only security, with the lending institution having no ability to attack the other investments held by the SMSF, the property is originally purchased in the name of an instalment trust, and can only be transferred into the name of the SMSF after at least one payment is made to that trust.
QI have bought a property with my SMSF that is to be fitted out as an office-residence for rent. Am I able to be the owner-builder?
AI take it you have joint-ventured the purchase. You should be able to act as the owner and builder for the development, you will not be able to become the tenant of the residence, but could rent the office portion. Members are banned from getting immediate benefits from superannuation, which would include you renting the residence portion even if a market rent is paid.
QWe have decided to look after my ageing mother-in-law and, unfortunately, due to our home not being on one level, it is unsuitable. We have therefore decided to build a home on one level and to design a room for her that will incorporate wheelchair access and special showering needs, etc. We have our own self-managed super fund. Can I use these funds to buy our home?
A You could not buy your home, as SMSFs are banned from buying assets and investments from members, except in limited cases. Exceptions include business real property, publicly listed investments, such as shares, and widely held trusts, such as managed investments.
Email questions to max@taxbiz.com.au
Self Managed Superannuation Funds: A Survival Guide, by Max Newnham, is
available in book stores.
Frequently Asked Questions about this Article…
Can an SMSF borrow to buy property?
Yes. Since a change in the late Howard government years, self-managed super funds (SMSFs) can borrow to buy property — but only if strict rules are followed. The purchase must be allowed by the fund’s investment strategy, the asset must be held via a trust arrangement (usually an instalment trust), the loan must be non‑recourse, the lender can only use the property as security, and the SMSF must make at least one payment to the trust before the asset can be transferred into the fund.
What is a non‑recourse loan for an SMSF and why does it matter?
A non‑recourse loan means the lender’s only claim is against the property purchased — they cannot go after other assets held by the SMSF or the members personally. SMSF borrowing arrangements must be non‑recourse so the lender has no ability to attack the fund’s other investments.
I’m under preservation age — can I access my preserved payout to buy an investment property personally?
No. If you are under preservation age you cannot access preserved superannuation benefits to buy investments outside super. However, you can roll your preserved super into an SMSF and then use the SMSF to purchase an investment property provided all SMSF borrowing rules and conditions are met.
Can my SMSF borrow to buy a more expensive property than the fund currently holds in cash?
Yes — borrowing lets an SMSF buy a more expensive property than its current cash balance, but only if the transaction meets all requirements: the purchase must fit the fund’s investment strategy, the asset must be held in the required trust structure (instalment trust), the loan must be non‑recourse, and the required initial payments to the trust must be made.
Can an SMSF buy my family home or buy property from a member?
No — SMSFs are generally banned from buying assets from members. There are limited exceptions (for example, business real property, publicly listed investments and widely held trusts), but buying a member’s private family home is not permitted.
Can I act as owner‑builder for an SMSF property development and live in part of the property?
You can act as the owner and builder for an SMSF development and the SMSF may rent commercial portions (for example, an office). However, SMSF members are prohibited from obtaining immediate personal benefits from fund assets — so you cannot become the tenant of the residential portion or live in the residence portion even if market rent is paid.
What is an instalment trust and what initial payment rules apply when an SMSF borrows to buy property?
An instalment trust is the trust structure used when an SMSF borrows to purchase an asset. The property is initially purchased in the name of that trust, and the SMSF must make one or more payments to the trust before the asset can be transferred into the SMSF’s name. This structure, together with a non‑recourse loan, helps ensure compliance with SMSF borrowing rules.
Where can I find more practical guidance on SMSF property borrowing?
The article references Max Newnham’s book 'Self Managed Superannuation Funds: A Survival Guide' for more detail, which is available in book stores. The article also lists an email contact (max@taxbiz.com.au) for questions referenced in the original piece.
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