Can I sell my property to my SMSF?

22 Jun 2023
Meg Heffron

Meg Heffron

Managing Director

The answer depends on a number of factors – primarily the type of property and what will happen after the SMSF buys it (ie, who will rent it from the SMSF?).

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There are strict rules about the sorts of things SMSFs can buy from “related parties”. The term “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 (for example 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”. 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 (say) 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.

There is one exception which is fairly unusual. Some people run businesses 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. 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.

The SMSF can own residential property but it would need to buy it from someone entirely outside the family. And 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.

But what about commercial property (business real property)? The position is entirely different here. Not only can the fund buy it from a related party, it can also lease it back to (say) the family business. There are more rules to be careful of here. For example, the lease would need to be completely commercial. This 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.

When it comes to the purchase itself, the arrangement also needs to be entirely commercial. For example, it would be a problem if the fund didn’t pay enough for the property or if it paid too much. Similarly, take care with the terms of the sale – is the deposit paid consistent with normal commercial sales? And the settlement period?

If the SMSF doesn’t get this right, there can be very serious consequences.

One of these is that if it doesn’t look like the super fund is receiving a commercial amount of rent (say the business is paying too much), any income the fund receives (for example the rent) will be classified as “non arm’s length income” (often called NALI). Non arm’s length income is a real problem – it’s taxed at the top marginal rate rather than the usual super fund rate of 15%. And that can even apply to any capital gains the fund makes when the property is eventually sold. All sorts of things can cause SMSFs to have a non arm’s length income problem – not paying enough for it in the first place, receiving too much rent or even incurring expenses that are lower than commercial terms. Artificially low expenses can be more common than you’d think. What if the family business – as the tenant – pays for things the fund should pay for? That would be a problem. Or even having the members do things like major work on the property that the fund doesn’t pay for can be a problem.

There are definitely traps to watch here and it’s important to get advice.

Providing all these are taken care of, though, there’s no reason the SMSF couldn’t buy business real property that is already owned by its members. In fact it could even be given to the fund as a contribution (rather than the member receiving cash) or the SMSF could borrow to buy it under a special “limited recourse borrowing arrangement”. This is definitely an area where it pays to get advice first as there are more rules and limits on contributions and these types of borrowings.

All SMSFs need to operate in line with their trust deed and investment strategy. It’s unlikely a trust deed would prevent an SMSF from buying business real property from a member but it’s worth checking. If the fund hasn’t owned a lot of property before and this property will represent a large proportion of its investments, it’s likely this will reflect a big change in the trustees’ investment strategy – they should update their documentation to make sure it’s clear this has been a conscious decision.

And finally before even considering any of these specific rules the trustees should ask themselves one key question : why is the property being bought in the first place? Remember, all super funds exist for the sole purpose of helping their members save for retirement and protecting their family should they die. Everything the trustees do has to be checked against this “sole purpose”. If the real reason you want to sell a property to your SMSF is because you need the cash or you feel it would be good for your business, you may well be breaking one of the most fundamental rules of super – the sole purpose test.

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