What you need to know about buying residential property through an SMSF

The tax office must be kept happy too, warns Peter Freeman

Using your self-managed superannuation fund (SMSF) to buy a geared residential property as a way of ensuring you can afford to live where you want in retirement may work out well in theory.

Unfortunately, how this strategy works out in practice isn't clear-cut.

The big issue is what happens when you have retired and want to use the house or unit.

In theory, there appear to be three possible options:

• simply move into the property and live in it while it continues to be owned by your SMSF;
• transfer the property to your name (and that of your partner, where relevant) and then live in it;
• sell the property, pay out the proceeds to yourself and then use this money to buy a home in the same area.

Unfortunately, while the first option seems best, Craig Day, senior technical services manager with Colonial First State, believes it would breach the sole-purpose test that requires superannuation to be used solely for the purpose of providing benefits to a fund's members when they retire.

He cites, in particular, tax office ruling SMSFR 2008/2.

This states, among other things, that a trustee must maintain an SMSF in a manner that complies with the sole-purpose test at all times while the SMSF is in existence.

The ruling also states that the benefits a fund provides must be in the form of one or more lump sums (which may be paid either in money or in specie) or pensions (which cannot be paid in specie).

While retirees would get a benefit from living in a house or unit owned by their SMSF, Day argues that the nature of this benefit means it wouldn't be provided in a form acceptable to the tax office.

It should be noted, however, that the tax office is yet to issue a ruling on the specific issue of retirees living in a property owned by their SMSF.

What of the second option of transferring the property to the relevant member or members of the SMSF, who then live in it?

This has the obvious downside of triggering stamp duty on the value of the property, but Day says the tax situation may be worse than this as it may also result in the fund having to pay capital gains tax.

This, he argues, may even apply where the fund had converted to pension phase as, at the point immediately before the property's transfer to you, it would cease to be in pension phase and so any net increase in its value would be subject to CGT.

As for the third option, Day says that, while it should work from a compliance and tax perspective, it would still trigger transaction and stamp duty costs.

While not a point made by Day, a self-managed fund selling a property also could be hit if the Gillard government's proposal to impose a 15% tax on every dollar in excess of $100,000 of annual earnings generated by the assets backing a super pension is implemented.

Day says an alternative strategy could be to maintain the property in the fund, use the rent paid as pension payments and rent a similar property in the same area.

Super tip

A couple considering using their SMSF to gear into a property as a way to ensure they can afford a family home in their desired area when they retire need to take full account of the issues examined in the main article.

In addition, they should be aware that the older partner is likely to satisfy a condition of release and so get access to their super before the younger.

In this situation, neither option 1 nor 2 talked about in the report can be considered until the other partner also can access their super.

Option 3 is fine since the proceeds of the property sale can be split, although selling before the full amount is available often won't be sensible.

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