More investors are purchasing property in an SMSF.  This is an investment strategy approved by the ATO as long as the legislation is complied with.  Naturally, there are some common mistakes to avoid.

1. Approved Property

A Fund can purchase residential or commercial property as an investment.  However, it is prohibited from purchasing residential property from a member or associate.  Commercial property though can be purchased from a member, provided it is at market value and the rent paid is also at the going rate.

2. The Wrong Name

If a loan is required, you must acquire the property with a Property (or Bare) Trust with its own corporate trustee.  This trust will be the purchaser on the contract and the legal owner of the property on the title.  We have seen agents use the SMSF or even the member as the purchaser.  This can trigger a second payment of stamp duty to correct the error.  (Also, keep the contract and all bank statements and records as the SMSF must prove it has made all the repayments as the beneficial owner, then there will be no further stamp duty when the property is transferred to the SMSF after the debt is cleared.)

3. Renovations and Leverage

If the property acquired requires renovation or capital improvements and borrowing is intended, the changes to the original asset could trigger the "replacement asset" rules and accordingly, the asset would no longer be exempt from the general borrowing prohibition.  Even if the fund utilises its own capital, this section can be triggered if the improvement results in the asset becoming a different asset (eg., building on a vacant block of land).  It is also not possible to use the equity in an investment to use as a deposit to purchase another property.

4. Life Insurance

It is usual that on the death of a member their fund balance must be paid out.  You can't 'part sell' a property, and if it is an old deed, not only may the member's proportion of the property have to be paid out but the life policy proceeds as well.  Review and update the deed, and use the appropriate life policy to allow the property to remain in the SMSF.

5. Rollovers from retail/industry funds

Don't be surprised if the rollover is less than your last statement; the fund may have to sell some assets and this may trigger CGT.  Also, consider the insurance in the industry fund, it could be at a fair price.  Check out the cover with a responsible agent.  If it is value, leave some moneys in the existing fund and contribute enough each year to pay the premiums.

Buying property in an SMSF can provide benefits and comply with the 'sole purpose test'.  It is not just a matter of checklists or getting around the regulations, but ensuring it's the right strategy for you and correctly structured.

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.