First Home Buyers SMSF Strategy

15 Mar First Home Buyers SMSF Strategy

Can’t afford to get on the home ownership ladder?

Many young people are choosing to rent while investing in property with their self managed super fund (SMSF), rather than struggling to get onto the home ownership property ladder.

It offers an investment that usually suffers fewer fluctuations than the share market and, as the first homebuyers market can be pricey to enter, offers long-term investment leverage.

However, whilst you may have the potential to substantially increase your final superannuation balance using residential or commercial property investment, due diligence must be taken to ensure you invest correctly without breaching The Superannuation Industry (Supervision) Act (SIS Act).

1) You must have an investment strategy

As a trustee, you must prepare and implement an investment strategy for your SMSF as per the SIS Act.  Your investment strategy must show the purpose behind it and how it will benefit the members of the SMSF (the sole purpose test). A licensed financial adviser or SMSF accountant can help you with setting up an appropriate investment strategy.

2) Your investments need to be independent

You cannot acquire a property from a person or entity that is related to a trustee member of your SMSF. This restriction also applies to leasing the fund’s property to a person or entity related to a trustee or member of your SMSF. So you can’t rent your super fund property to a family member or yourself. The exception to the rule is that your SMSF is allowed to acquire from and lease business real property to a person or entity related to a trustee or member of your SMSF. So your SMSF could purchase your business premises if that is where your business operates from and then lease it back to your business.

3) Check the difference between ‘off the plan’ and ‘house and land’.

A SMSF can purchase ‘off the plan’ property such as an apartment. The deposit and costs such as stamp duty can typically be paid using existing cash funds in the SMSF.

Once the apartment is built and strata titled, then finance can be used to complete the purchase in line with limited recourse lending requirements.

A SMSF cannot purchase land and construct a house on the block using borrowings, or purchase a house and land package using borrowings. However, some vendors or developers may offer an off the plan house and land package. The rules are constantly changing so check with an accountant or financial planner or the ATO.

4) Is it maintenance or improvement?

Your SMSF can use its limited recourse borrowing arrangement to pay for certain expenses such as maintenance or repair to the asset, to make sure the asset remains in worthy state of condition.

But you cannot use the limited recourse borrowing arrangement to improve the existing asset such that it becomes a new asset. So renovating the kitchen or bathroom beyond the need of normal repairs to enhance the value of the property is a no-go. There are very strict rules on this under section 67B of the SIS Act 1993.

Overall, if you’re struggling to get on the property ladder but have a healthy amount in your superannuation, then using your SMSF to invest in property in an option. Just make sure you are aware of the rules and the limits, and seek advice from your accountant or financial planner.

Catherine Price is an ASIC registered, self-managed super fund (SMSF) auditor. She ensures SMSF owners maintain compliance and stay ahead of the ever-changing Super fund environment, working with accountants and financial planners to provide an efficient, cost-effective, quality audit service. .