With the growing number of self-managed superannuation funds it has become apparent that there has been a genuine increase by SMSFs to borrow to invest in residential property. The reasons for the increase could be due to varying factors including the GFC and the ATOs’ clarifications on the rules for SMSFs borrowing to invest in residential property. Also it seems individuals who are buying property in a SMSF have changed their mindset from ‘I”ll let a professional run that fund’ to ‘I can do the job just as well as anybody else does’.
While the setting up of a SMSF and then using the money to buy property will be beneficial for some, it isn’t for everyone as it is bound by a complex set of industry rules and regulations. To begin with, there are restrictions placed on the types of property that may be acquired from related parties. Related parties include the member, trustee, their relatives and any trust or company that they control.
The Superannuation Industry under the Supervision Act recognises two types of property that can be owned by the superannuation fund – business real property and any other property. Business real property is the only type of property that can be acquired from a related party and there is no restriction on the type of property that can be obtained from the market at auction or by private treaty. The definition of business real property can be summed up by the ‘use of the property’. It must be used only for business purposes regardless of who is running the business (the SMSF member of any other party).
If a property is used exclusively to operate one or more businesses then it is defined as business real property but if a part of the property is used for residential purposes it is not regarded as business real property.
Because of the influential nature of property sales people, it is imperative that SMSFs are thorough in their research and use a licensed specialist as sales people can often be unaware of the regulations governing SMSF investment.
Some of the the ATOs compliance issues around SMSFs borrowing to buy property include: no proper and correct documentation, confusion between the members and trustees of SMSFs ultimately resulting in breaches of the limited recourse borrowing arrangements.
Other reported issues arising from dealing with non-licensed specialists include: purchasing a property without detailed analysis of whether it is a good investment decision, over paying for the property, and struggling to meet financial requirements if the property is untenanted, for a long period.