Investing in property is a popular option for self managed superannuation funds (SMSF). Unlike retail funds, the members of an SMSF are the trustees, and make all the investment decisions. This can include investing in residential or commercial property.
In deciding on a property to purchase, many SMSF trustees invest in “holiday homes”, and rent them out as short term accommodation for holiday makers. Although the rental income can fluctuate more widely than a long term rental property, in line with the seasons for example, the investment return on a holiday home can be quite attractive if the property is occupied for most of the year.
Although the superannuation rules preclude the trustees or any related party from renting, living in or using a holiday home whilst it is owned by an SMSF, a common question is whether the trustees can move into such a home once they retire. The short answer is yes, but there are a few issues to be careful of.
The sole purpose test
The superannuation legislation provides that an SMSF may only be maintained for the “sole purpose” of providing retirement benefits to the members, or to their dependants if a member dies before retirement. In determining whether an SMSF has satisfied the sole purpose test, the Taxation Office has indicated that one must consider all the facts and circumstances surrounding the trustee’s behaviour in relation to the acquisition of the property.
For example, if the trustee invests in a property where there is a significant likelihood that the investment in the property will not provide any return for the SMSF and the trustee simply purchased the property because the members always dreamed of retiring to a lovely seaside home, then the Taxation Office may consider that the transaction is a breach of the sole purpose test.
However, if the holiday home provides a good return for the SMSF, be that by way of rental income or capital growth, then the fact that the members will retire to that home will be considered only an ancillary purpose, and the sole purpose test will have been satisfied.
The property must be transferred out of the SMSF
Even if members of an SMSF have retired, the normal investment restrictions apply, and a property owned by their SMSF may still not be used by them or by any related party. The property must be transferred to the members in their personal capacity, and will be treated as a lump sum benefit. In some Australian jurisdictions, this will trigger transfer duty, although some jurisdictions provide that transfers of this sort are exempt from duty, or only nominal duty is payable.
Capital Gains Tax
The transfer of a property from an SMSF to one or more members in their personal capacity is a capital gains tax event. However, if all members of an SMSF are only in receipt of account based pensions at the time of the transfer of the property, then the SMSF will be fully exempt from tax, so no capital gains tax will be payable. To the extent that any member has an accumulation balance or is in receipt of a Transition to Retirement pension, then some capital gains tax will be payable. In any event, provided the asset has been held for at least 12 months, the maximum rate of tax on the capital gain will be 10%.
Although there are issues to be aware of, purchasing your future retirement home in your SMSF is a legitimate strategy. By purchasing the home well before retirement, trustees can take advantage of buying at the right time, or when their future home is affordable. And if plans change and the home is no longer needed for retirement, then there is no harm done. The property can still provide a decent income, or be sold to help fund a different property purchase.
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