Can I sell my property to my SMSF?
There is only one exception to the strict rules applying to the sale of properties to SMSFs, and not many funds fit the criteria.
Meg Heffron, director at Heffron, said selling a property to an SMSF is generally not allowed except in circumstances where the entity or person selling the property actually runs a business involving residential property.
“For example, a farm where the owners also live, businesses that buy and sell properties or they own so many properties that their activities in renting them out are classified as a business,” Ms Heffron said.
“When the residential property in question is part of that business, it can be classified as business real property and so can be sold to the member’s SMSF.
“But to be classified as a business, the activity has to be pretty substantial – unfortunately one property rented out via Airbnb is unlikely to be enough.
“So, for most people, it’s not possible to sell a residential property they already own, directly or via some other structure, to their SMSF.”
Ms Heffron said “related party” has a specific definition when it comes to superannuation but as a general rule it includes the members and trustees of the fund, their family and other entities they control such as a company or a family trust controlled by the member and/or their family.
“When it comes to property, SMSFs can’t buy property from related parties unless it meets another definition – it has to be ‘business real property’,” she said.
“Generally, business real property is exactly as it sounds, a commercial property such as an office building or factory rather than a home.
“So, if the property you already own is a holiday house or residential investment property, the answer is no. And it wouldn’t matter whether it was owned directly by the member and/or their family or by their family trust, all would be related parties and so the same rules apply.”
Although an SMSF can own residential property, Ms Heffron said it would need to buy it from someone outside the family – and even then there’s another catch.
“Even if the SMSF is fine to buy the property - because it’s being bought from a genuine third party - it can’t be rented back to the family either.”
“That’s because SMSFs can’t normally lease assets to related parties. In fact, say the property was a holiday house, it couldn’t even be used occasionally by the family.”
The regulations are different, however, when it comes to commercial property or business real property.
“Not only can the fund buy it from a related party, it can also lease it back to the family business,” she said.
“However, there are more rules to be careful of here. For example, the lease would need to be completely commercial which would include charging an appropriate amount of rent, making sure it’s paid regularly, increasing it in line with the rental agreement and normal commercial terms, making sure the tenant (the family business) and landlord (the SMSF) both pay the costs that would normally belong to each of them and more.”
Purchasing the property also needs to be done in a very strict and regulated manner, she said and needs to be entirely commercial.
“If the SMSF doesn’t get this right, there can be very serious consequences,” she said.
“One of these is that if it doesn’t look like the super fund is receiving a commercial amount of rent, for example, the business is paying too much, any income the fund receives such as rent, will be classified as ‘non arm’s length income’ which can be taxed at the top marginal rate rather than the usual super fund rate of 15 per cent.
“That can even apply to any capital gains the fund makes when the property is eventually sold.
“There are definitely traps to watch and it’s important to get advice but providing all these are taken care of there’s no reason the SMSF couldn’t buy business real property that is already owned by its members.”
