Craig Stone, general manager of quality and technical services for SuperConcepts, said the LRBA closure does not directly affect that strategy, but trustees should seek advice on how to extricate the property from the holding trust in a tax-efficient manner when the time comes.
“For many SMSF trustees, a long-term goal is to eventually live in a residential property held within their fund. While this can be a legitimate strategy, it is important to understand that strict superannuation rules apply throughout the life of the investment, especially when transitioning from investment to personal use,” Stone said.
“It’s probably one of the things where anyone that has really used this strategy for a residential property for something like a beach house that they’re planning to retire into 10-15 years ago is now at a point where they’re unwinding it to move into it and they are at the point where they’re thinking through these compliance steps.”
Stone said trustees should firstly be aware that, at all times, a residential property held by an SMSF is subject to the sole purpose test. This means the property must be maintained solely for the purpose of providing retirement benefits.
“Members and their related parties cannot use or occupy the property while it remains within the SMSF, regardless of whether the fund is in accumulation or pension phase,” he said.
“This is a fundamental constraint that often gets overlooked in early planning discussions and must be clearly understood before any exit strategy is considered.”
He continued that where the property has been acquired using an LRBA, an additional layer of complexity arises. Under this arrangement, the asset is held in a separate holding (bare) trust, with the SMSF holding beneficial ownership and the right to acquire legal title once the loan has been repaid.
“This structure must be unwound before any consideration can be given to personal use of the property,” he added.
The first step in getting a property out of an SMSF is to ensure the member meets a condition of release, said Stone, which is typically retirement, after reaching preservation age and if they have sufficient unrestricted, non-preserved benefits.
“Without meeting these requirements, the SMSF cannot lawfully pay a benefit, whether in cash or in-specie,” Stone said.
“Trustees should also ensure the fund’s trust deed permits in-specie benefit payments as part of this planning process.”
The next step is clearing the LRBA, and Stone said they must generally be dealt with before the property can exit the fund.
“In most cases, this requires the loan to be fully repaid. Only once the borrowing has been extinguished can the SMSF obtain full legal ownership of the property from the holding trust,” he added.
“This is a critical step, as the property cannot be transferred out of the SMSF while it remains subject to the LRBA structure.”
He continued that once the property is held directly by the SMSF, trustees can consider the appropriate exit strategy which will typically involve either selling the property, with proceeds paid as a benefit, or transferring the property to the member as an in-specie lump sum benefit.
“Any transfer must occur at market value and be supported by appropriate documentation and valuation evidence. An in-specie transfer is treated as a lump sum benefit and cannot be used to satisfy minimum pension payment requirements,” Stone said.
“Trustees should also be mindful of the tax consequences. The transfer of the property will trigger a capital gains tax (CGT) event within the SMSF, although the extent of any liability will depend on the fund’s tax position, including whether it is fully or partially in pension phase.”
He continued that in addition, stamp duty may apply when the property is transferred to the member, depending on the applicable state or territory rules.
“Only once the property has been successfully transferred out of the SMSF does it become a personal asset. At that point, the member is free to occupy or otherwise use the property without restriction,” Stone said.
“While retiring into an SMSF property is achievable, it is not a simple or automatic process. It requires careful sequencing, compliance with superannuation law, and a clear understanding of tax and duty implications. Trustees should seek professional advice well in advance to ensure the transition is managed in a compliant and tax-effective manner.”
