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By Peter Hogan, Head of Education and Technical, SMSF Association
Can I sell my rental property into my SMSF?
Owning property in your SMSF can be both a rewarding experience and also one which presents difficulties which must be managed. Unlike owning property personally, special rules apply to property owned by SMSFs, particularly in the case of residential property.
The question is often asked whether the trustee can sell their personally owned rental property to their SMSF? The answer is that, subject to very limited exceptions, they cannot.
The following article looks at why this is the case and what trustees need to be aware of.
The Pros and Cons of direct property ownership in an SMSF
The clear advantages of owning direct property in your SMSF include receiving the rental income paid to the SMSF for use of the asset and a lower capital gains tax rate on disposal of the property. The rental income adds to your retirement savings and is taxed at the concessional rate of 15%.
Are there any restrictions in how my SMSF acquires residential property?
There is no question that SMSFs can own residential property which is acquired from unrelated parties as part of a normal market transaction.
Even clearer is that the residential property can represent a significant proportion of the SMSF’s total assets, if that is what the trustees genuinely believe to be in the best retirement interests of all members of the SMSF. The SMSF’s investment strategy would need to accommodate the proportion of the monies of the SMSF in a single asset, addressing the lack of diversification and potential liquidity issues, but this is not a barrier to owning the property in your SMSF.
There are however substantial restrictions on you, your relatives or family companies or trusts dealing with your SMSF when it comes to residential property.
It is not possible under the superannuation rules for your SMSF to acquire residential property from any of the above related parties to the fund.
There is a general prohibition in the superannuation law preventing SMSF trustees from acquiring any assets from related parties such as members or their relatives. This is regardless of whether the transaction is proposed to be at market value or not.
There are limited exceptions to this general prohibition. However, the only exception to your SMSF acquiring property from related parties is if the property is within the definition of business real property in the superannuation law. Residential property is very deliberately not listed as one of the exceptions to this general rule.
Can my rental property be treated as business real property?
A question that often gets asked when an SMSF trustee understands that there are restrictions on their SMSF acquiring a rental property that they own, is why their rental property does not qualify as business real property?
They make the point that they are earning rental income from the property and are claiming expenses to maintain the property and so on. They view their activities in relation to the property as business-like and consider themselves to be operating a property rental business.
What type of property is treated as business real property?
Generally, real property will be treated as business real property for superannuation purposes provided the following criteria are met:
What can you take away from this? Update shifts to other property options
Property is a fundamental element of many SMSF/retirement portfolios and exposure can be achieved in alternative ways to residential properties.
The major institutional investors such as the big super funds and insurance companies typically allocate between 8% to 15% of their portfolios to commercial property.
It’s generally agreed the two most common forms of property investments made by trustees and members of SMSFs are business premises relating to a trustee or member’s business, or former business, and residential investment units.
One of the most logical and accessible avenues for SMSF property investing in this new landscape is investment property funds. These can either be direct (i.e. unlisted) property funds or ASX listed funds, generally referred to as AREITs (Australian Real Estate Investment Trusts)
Charter Hall Direct have a current target of around a 9% pa total return - income and capital growth - and have a current prospective running income yield from 5.8%pa: the award winning Charter Hall Direct Office Fund, which focuses on prime CBD office buildings; through to 6.2%pa: the Charter Hall Direct Industrial Fund No.4 which invests in industrial and logistic related commercial property tenanted by major Australian businesses; to 6.7%pa: the Charter Hall Direct Diversified Consumer Staples Fund which invests in commercial properties tenanted by producers and distributors of consumer staples goods; and 6.9%pa: the Charter Hall Direct PFA Fund which invests in predominantly government tenanted office buildings in Australian capital cities.