Buying real estate through a self-managed super fund (SMSF) is a popular investment strategy in Australia, but trustees and members must be aware of compliance pitfalls with SMSF properties.
How complicated is SMSF property compliance? CommBank shows that two-thirds of members seek guidance from external advisers for compliance issues with their fund because of the complexities involved.
Let's see if we can help you with four important things to remember for SMSF property compliance. If you'd like to learn more, contact Geelong accounting firm WMC Accounting and we'll provide further assistance.
1/ The sole-purpose test
The sole-purpose test means that any investment your SMSF makes must be for the sole benefit of providing retirement or death benefits to members. In other words, your investment decisions or arrangements cannot directly or indirectly benefit you or anyone else in the meantime.
For example, you can't purchase a property from a friend or family member, or allow someone you know to rent or live in an SMSF-bought home. All transactions must be done according to the arm's length rule.
2/ Renovation of geared properties
Negative gearing is common among real estate investors, but there are compliance pitfalls to consider with SMSF properties.
You are not allowed to renovate a home that you've purchased through an SMSF using money from the fund. Any improvements you make must be paid out of your own pocket – although repairs and maintenance using SMSF cash is fine.
3/ Legal documentation
One of the more complicated areas of SMSF property compliance is the legal documentation involved. First, you must ensure the fund is established before the contract to buy a home is signed.
Scour the documentation thoroughly to prevent any errors from slipping through that could result in costly unwinding arrangements or the need to redo contracts. Listing incorrect names on the title of the property is a simple mistake that could prove expensive to rectify later.
4/ Tax considerations
SMSF properties have various tax benefits. Notably, any earnings on rental income are taxed at a maximum 15 per cent rate if SMSF members are in the accumulation phase of super and 0 per cent during the retirement phase.
When selling the property, capital gains tax is just 10 per cent for accumulators, or 15 per cent if the property has been held for less than 12 months. Retirement phase members, again, pay 0 per cent.
Nevertheless, tax compliance within SMSFs can be complex, which is why many people turn to professional accounting services to ensure they don't breach regulations.
WMC Holdings Pty Ltd t/as WMC Accounting is a Corporate Authorised Representative No. 124 5401 of SMSF Advisers Network Pty Ltd ABN 64 155 907 671 AFSL No. 430062 www.smsfadvisersnetwork.com.au
Liability limited by a scheme approved under Professional Standards Legislation*
*Other than for the acts or omissions of financial services licences.