Self Managed Super & Investing in Property

Posted on Jun 28, 2012 | 0 comments

Self Managed Superannuation Funds and Investing in Geared Property – An Update

After several years of doubt and uncertainty, trustees of Self-Managed Superannuation Funds finally have some clarity about the strategy of borrowing to invest, particularly in direct property.

Earlier this month the Australian Taxation Office issued a superannuation ruling on limited recourse borrowing arrangements (SMSFR 2012/1) which provides some clear direction as to what you can and cannot do. For many trustees, knowing exactly what you can do in relation to borrowing for direct property investment has always been the issue and getting it right is absolutely critical.

The largest group of SMSF investors who find geared property appealing are owners of small businesses where their SMSF fund buys the property from which the business is run.

A business property is one asset that a super fund can acquire from its members or someone related to fund members. It can also rent or lease the property to a business run by members or a relative. Note though, that these special concessions are not available for residential property investments owned by fund members or those related to them.

The one important change to the geared property rules in the latest ATO ruling improves the strategy of SMSF funds buying a business property from members or relatives. Previously funds without the financial resources to buy a business property have been reluctant to borrow because of a restriction that has discouraged any improvements being made to the property that go beyond making basic repairs for maintenance. The ruling has softened a previous ATO hard line interpretation that major modifications to a property funded by a loan, in effect, create a different asset because it improves the property.

Such improvements were forbidden for funds that borrowed and could lead to a circumstance where the fund would have to repay the loan immediately. The restriction has now been relaxed, with a new entitlement that allows a fund to finance the improvements with other fund resources, as long as it is not borrowed money. The important qualifying consideration is that the fundamental character of the property is retained. The difficulty previously was that SMSF’s could buy a commercial premises with borrowed money but if essential changes were needed, it couldn’t be done without first paying off the loan.

Take for example a shop, where gutting the basement or adding an extra storey would create more space. As long as the property continues to be a shop, the improvement can now be done (without borrowing) where previously improvements for a fund with a geared property were forbidden. There is no limitation if the property is not geared.

This change is likely to lead to an increase in the number of funds owning business property and is a welcome and practical development.

Contact JWA today to arrange a FREE consultation to discuss investing in property through your Self Managed Super Fund.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>