There may be adverse consequences if you do not understand property investment rules relating to a Self Managed Superannuation Fund (SMSF), particularly if the property is acquired from a fund member or a related party. Chan & Naylor Tax Accountants in Parramatta discuss how you can acquire your investment property with SMSF.
In some instances, you can buy an investment property from a member or related party depending on the situation. You have to ask two questions: is the property a “business real property (BRP)?” and, does the acquisition meet the investment strategy of the fund in accordance with the sole purpose test?
Under the Superannuation Industry (Supervision) Act, a trustee is generally prohibited from intentionally purchasing an asset from a related party except for listed securities, business real property and widely held trusts or managed funds. The asset has to be purchased by the SMSF at market value.
Who is considered as an SMSF related party? Those who are members and trustees of the fund, relatives of members and trustees of the fund, entities that are controlled by the members, trustees or their relatives and other persons known as “Part 8 Associates” of the SMSF members are considered as SMSF related party.
A business real property is an investment property used solely in a business, such as commercial premises. It is important to consider whether the property is regarded as commercial or residential like in the case of a doctor who uses his home as his clinic. The whole property must be utilized for business purposes.
Residential property may be defined as a business real property where the residential property is held as a trading stock of a property development operation or is leased to a business and used by that business’ for short-term rental accommodation purposes. It could also be a BRP if it is situated on land used to conduct a primary production business, given that the area used for private purposes does not exceed two hectares.
If the property is BRP, the SMSF has to buy the property at market value and is required to be substantiated. You have to consider the quantum of any capital gain or tax liability of such sale and how the fund will pay for the purchase. Is the transaction subject to GST and is there a qualifying concession or exemption? Remember that such transactions will incur legal and stamp duty fees.
Be careful when seeking advice. Contravening a super rule can be penalized for up to 12 months in jail so make sure you know the compliance requirements and the process to affect the transaction.
If you would like to know more about buying your investment property with your SMSF, you can click here to know more about Chan & Naylor services. You can leave your details here and we can schedule you for a free consultation. We’ll contact you to explain more.
Whether you are a beginner, seasoned investor or business owner, our property and business tax accountants in Parramatta and in our other national offices can give you guidance to maximise the financial areas of your life. We can also give you an integrated and tailored solution for your superannuation, taxation, property investment, asset protection, estate planning and more.
Chan & Naylor Group has national offices in Brisbane and Capalaba in Queensland, Melbourne and Moonee Ponds in Victoria, East Perth in Western Australia, and South West Sydney, Parramatta, Pymble, North Sydney, and Sydney in New South Wales.
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