As an Australian with foresight, you’ve probably considered or managed to buy an investment property through your self-managed superannuation fund (SMSF).
As you near retirement, one question may linger; “Can I live in my SMSF investment property?”
If you’re still in the accumulation phase, you might already know that using SMSF-owned properties for personal benefit or to provide accommodation to related parties or friends is illegal. Breaking these rules has severe consequences.
But that doesn’t mean that ultimately living in your SMSF property is impossible. There are opportunities for that and there are strict rules to take into consideration.
In this post, we’ll have an in-depth look into this topic and provide a comprehensive roadmap for legally living in an SMSF property.
Understanding how the Sole Purpose Test affects living in your SMSF property
The sole purpose test prohibits the fund members from using SMSF assets for personal benefit until they’ve reached preservation age and transitioned to pension. An SMSF must pass the sole purpose test to be eligible for tax concessions.
While it doesn’t outrightly prohibit members from residing in a property owned by the SMSF, it states that any such arrangement must align with providing retirement benefits.
This principle is meant to make sure that the fund provides retirement benefits for the members. The fund can also provide benefits for any related parties or dependants of a member who passes away.
As such, receiving personal financial benefits from SMSF investment properties before retiring disqualifies the fund and its members from the test.
Breaching the sole purpose test could lead to your SMSF losing its tax concession eligibility and the trustees could face civil and criminal penalties.
So, can you live in your SMSF Property?
Yes, you can live in your SMSF property. But you must meet several special conditions enforced by the Australian Tax Office (ATO). Generally, To live in an SMSF property without breaking any laws requires you to remove the property from the SMSF to reside in it.
There are a few ways you can live in your SMSF property, these being:
- Meeting retirement conditions
- In-specie property transfers
- Utilising Business Real Property
Meeting Retirement Conditions
This is the main option for ultimately living in the SMSF investment property. Once you’ve reached retirement age, you can transfer the SMSF property to yourself since you’ve met the condition of release. However, make sure to also be aware of SMSF residency rules, as failing to meet these can affect your fund’s compliance.
For people looking into this arrangement, you need to meet the following conditions of release:
- Reach the preservation age and retire
- Reach the preservation age and start the transition-to-retirement income stream
- Retire from employment at the age of 60
- Reach 65 years even if you’re yet to retire
- Death
Some special conditions may also grant you access to your super benefits even if you’re yet to reach preservation age. These circumstances include terminating gainful employment, being temporarily or permanently incapacitated, suffering severe financial hardship, suffering a terminal medical condition, meeting conditions of compassionate grounds.
In-Specie Property Transfers
In-specie property transfers, also known as off-market transfers, involve purchasing the investment property in your name or through the family fund first and then transferring the property title to your SMSF through an in-specie transfer.
The property must first be transferred out of the SMSF to a member’s name at market value to comply with SMSF regulations before it can be used as a personal residence.
This process allows you to use the property for personal reasons but eliminates the financial benefit you would ordinarily enjoy under a typical SMSF. However, the main benefit is that you or other SMSF members can live on the property without violating the sole purpose test.
To follow this process, your fund’s trust deed must allow this kind of transfer. You must also document the transfer at the market value. You need the following documentation:
- Standard Transfer Form
- Additional Lump Sum Contribution Form
- Pension Application Form (if you wish to transfer to a pension account)
You might also be exempt from paying stamp duty on in-specie property transfers that come with purchasing a property.
Keep in mind that this process might trigger a capital gain tax event. However, you could avoid CGT if the property was the sole asset supporting your pension.
Consider factors such as tax liabilities, timing, and financing to determine whether an in-specie transfer is more feasible than an ordinary SMSF investment.
Utilising Business Real Property
The rules are a bit more flexible if you desire to reside in a commercial property owned by your SMSF. According to the ATO, “business real property” refers to building or land used exclusively and wholly in a business.
For a property to be considered a “business real property” it must be used in a primary production business even if it contains a dwelling used for domestic and private purposes. The conditions are that the dwelling must not exceed two hectares of the property and the whole property can’t be used for domestic and private purposes.
Living on a farm with a farmhouse is a perfect example of a business real property. Or a property located in an industrial or commercial zone, such as a warehouse or factory.
Unlike residential properties, business real properties aren’t required to meet a condition of release for SMSF trustees to reside in them. However, you or the SMSF member who occupies the property must pay rent to the fund at the market rates.
Key Considerations on How To Live in Your SMSF Property
Finding the right property
If you’re looking to reside in your SMSF property, it would be best to find the right property to invest in. That means looking for a lucrative property that appeals to you and potential tenants as well.
Here are some factors to consider when looking for the right property:
- Location – Look at the growth potential in the location. While you want a house you can live in, you also want a property that can appreciate in value. Look for safe areas with multiple industries to support the local economy. Remember, you might have to lease the property out to a tenant before you live there yourself. Look for conditions that are suitable for tenants and yourself too.
- Maintenance – How often does the property need repairs and maintenance? What’s the average cost of repairs and maintenance? How accessible and affordable are property repair and maintenance professionals? Answer these questions to avoid investing in a property that is demanding maintenance-wise. You don’t want to spend a significant part of your savings or income on the property.
- Liquidity – While you want to live in the property, don’t forget that you might have to liquidate it one day. If you invest in a more liquid property, it becomes easier to sell it if the need arises.
You also need to consider the type of property you’re investing in. Some common property types that are suitable for SMSF investment include established houses, dual key properties, house-and-land packages, services apartments, and commercial properties. Each of these properties has its own level of maintenance, liquidity, and rate of appreciation.
Since there are many factors to consider, consulting with an SMSF buyers agent to make sure you’re making a wise decision is recommended. We’ll help you find the perfect property so you can ultimately live in it once you’ve reached retirement.
Contact us today to find the right SMSF property to live in.
Making sure your investment strategy is updated
If you plan to live on the property, it’s wise to ensure that it is included in your investment strategy. For example, your SMSF trust deed must allow for an in-specie transfer.
Also, the ATO encourages funds to consider asset diversification in their investment strategies to help manage risks. Focusing on only one investment option may hinder your long-term financial goals when you retire.
You must evaluate the advantages and risks of putting your retirement funds in a single investment property. Does it align with your investment strategy, your fund’s goals, and risk tolerance?
Answering these questions calls for the need to ensure that your investment strategy is updated.
Tax Implications and Benefits
Moving into your SMSF investment property after retirement has one sweet tax benefit—you become exempt from any income or capital gains tax in the context of superannuation.
But there’s a catch; you have to strictly adhere to all super guidelines and rules when the property is considered an SMSF investment. Failure to do that could lead to harsh tax consequences.
On top of that, all property expenses must be apportioned correctly to claim relevant deductions. If the property is sold before meeting the requirements for transitioning the property for personal use, capital gains tax may apply.
Consult with a tax professional to avoid triggering any tax events that could negatively impact your retirement plans.
Key Takeaways
Living in your SMSF investment property is possible. But it’s not that straightforward. Merely reaching preservation age doesn’t mean that you’re eligible to live on the property. You’ll have to conduct an in-specie transfer, purchase the property from the fund, or utilise a business real property.
On top of that, there are many rules and regulations to follow. You have to do it right, otherwise get hit with penalties and tax consequences. This is why you need strategic planning and professional advice.
Most importantly, you need to start planning early to maximize your chances of living in your SMSF property legally and successfully.