This article was originally published 11 January 2019.
Welcome to 2019. The New Year means many of us will be setting one or more New Year’s Resolutions. If one of your resolutions is to plan for retirement and eventually live in your SMSF property, be aware of the below significant hurdles. The laws around acquiring property with your SMSF aren't as clear cut as you may have thought. Although it's common knowledge that Australian law effectively prevents you from living in a property bought by your SMSF, there are examples of this occurring.
The sole purpose test
It all centres around the sole purpose test - the idea that superannuation money must be maintained for the sole purpose of providing a benefit to members in retirement, or in the event of disability or death. This essentially means that you can't invest super money into something that will give you a benefit before retirement.
The trustee's intention is key. Using super money to buy artwork, for example, is legal under the category of collectibles, but only if the person is doing that to make money for retirement (i.e. they're not deriving any personal use of the asset before retirement).
However, this situation changes when you retire. You can perform what is known as an 'in-specie' transfer of your SMSF’s assets to you in their current form, rather than by converting them to cash. But you do still need to consider stamp duty, which is payable on the transfer out of the SMSF into your name.
Technically you can:
- Acquire a property in super during your working life.
- Benefit from concessional tax rates on rental income.
- Make pre and post-tax contributions up to your caps to pay down any relevant loans.
- Then transfer the property out when you retire.
But, there is a high likelihood that the ATO will take a sceptical view and enquire as to whether there has been a breach of the sole purpose test.
The problem is that an investment property in an SMSF should only have been acquired if it was a good investment for the fund and in line with its properly formulated investment strategy. It should not be acquired with the intention that it will be the retirement residence for one of the members or their relatives. If the property is to be paid out in-specie to a member in retirement, although still within the law, it should only be done if it is logical or the only possible action for the fund, to reduce the chances of breaching the sole purpose test.
What about stamp duty?
Even if you do meet these caveats, you still need to pay stamp duty on the transaction - unless the property is in Victoria and Western Australia. Here, stamp duty is exempt. Even then, you still need to ensure your trust deed allows the SMSF to make an in specie distribution. If not, your trust deed will need to be updated before the transaction occurs.
While the New Year Resolution of buying and eventually living in your SMSF property is possible, it is complex. Keeping the sole purpose test in front of mind will help to make sure you're not the precedent the ATO uses when it comes to testing the rule with regard to property transfers.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings, etc., as at the date of issue. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances.
The information in this document is of general nature only and has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision on the basis of the advice above, a prospective investor needs to consider, with or without the assistance of a professional adviser, whether the advice is appropriate in the light of their particular investment needs, objectives and financial circumstances.