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Investing in real estate? Can my SMSF buy a Beach House for Family Use?

Friday April 1, 2016

Can my SMSF (self managed super fund) buy a Beach House for Family Use?

Sounds tempting?  There are so many rules to consider...

 

Sole purpose rule:

The  Fund must be run for the sole purpose of providing superannuation benefits to members when they retire. Current benefits to members and others fail the sole purpose test.

Inhouse asset rule:

An inhouse asset is an investment to a related party of the Fund which might include members, trustees, relatives and other related entities.

A beach house for family use is clearly an inhouse asset. The inhouse asset rule states that inhouse assets cannot be more than 5% of the total market value of Fund assets. If the beach house is less than 5% of the fund it might not be in breach of the inhouse asset rule, but it could still face other issues such as failing the Sole Purpose Test and not meeting the requirements for arm’s length commercial terms of rental etc.

Limited recourse borrowing:

SMSF’s are not allowed to borrow money. One exception is by Limited Recourse Borrowing. If an auditor finds that an SMSF has borrowed money without complying with Limited Recourse requirements the Fund could be deemed non-complying. This could result in very substantial penalties and fines.

Business real property:

SMSFs are restricted in dealing with related parties such as members. An exception is when buying business real property at market value. Business Real Property is defined as land or buildings used exclusively in one or more businesses. An SMSF can buy Business Real Property but failure to meet all of the requirements to qualify as Business Real Property may result in the Fund being non-complying.

Conclusion:

On the above basis any proposal to buy a beach house for a members’ family use would be non-complying and would not be recommended by competent advisors under any circumstances.  If you have any questions about using SMSF for investing in real estate please contact us on 9550 4600.