By Monica Rule

In Bulletin 470 I explained how a Self Managed Superannuation Fund (SMSF) can enter into a limited recourse borrowing arrangement to acquire a property. In this Bulletin, I will explain two other ways an SMSF can acquire a property without the need to borrow.

Let’s assume you have $200,000 in your personal bank account and your SMSF has $100,000 accumulated cash available.  You want your SMSF to purchase a rundown residential property that has become available on the market which is listed at $300,000.  The property is being promoted for its redevelopment potential.  Although the place is rundown you can see its potential as it is situated in an excellent location for potential tenants but it needs a lot of repairs and improvements to bring it up to a state where you can ask for a reasonable rent for the area. You have already contributed concessional contributions and non-concessional contributions up to your maximum contributions caps into your SMSF and therefore you cannot make further contributions into your SMSF to transfer your $200,000 of personal savings.

You already know that one way for your SMSF to acquire this property is to enter into a limited recourse borrowing arrangement with you and borrow the $200,000 needed from you.  You are also aware that if your SMSF borrows to acquire this property, your SMSF cannot use the borrowed money to make improvements on the property or to demolish, rezone and construct new units on the land.  You also know that your SMSF cannot use further accumulated money from future contributions and investment earnings to improve or renovate the property if it changes the character of the property.  In your situation, this means your SMSF cannot change this residential house into multiple units by demolishing and building.  So what can you do?

The good news is there are other ways for your SMSF to acquire a property and be able to renovate or demolish and start over without the restrictions of a limited recourse borrowing arrangement.

One way is to establish a private company or a private unit trust where you and your SMSF purchase shares or units in this entity.  This way you and your SMSF can pool money together and purchase a property through this entity.  Once the entity has acquired the property, the entity can do anything to the property, even demolish and build a new structure.  As long as the investment income received from the property is distributed between you and your SMSF in the proportion of the original investments by both parties, it complies with the law.  The related entity will need to comply with the other provisions of the superannuation law such as:

• not conducting a business;
• not investing with any other company or anyone else;
• not having any borrowings;
• not having a charge over any of its assets;
• only acquiring business real property from related parties,
• only leasing business real property to related parties, and;
• conducting all transactions at arm’s length.

If you don’t want to establish a related entity, another way is for you and your SMSF to purchase a property together is as “tenants-in-common”.  In our scenario you would personally own a 67% share of the property (i.e. $200,000) and your SMSF would own a 33% share of the property (i.e. $100,000).  As long as the residential property is purchased from an unrelated party, it can be acquired jointly by you and your SMSF under the superannuation law.  As there are no borrowings involved, the property can be renovated or demolished.  As long as all expenses and income of the property is distributed in proportion to the original investment of both parties, it is allowable under the superannuation law.

Many SMSF members who own the premises they conduct their business from, use the tenants-in-common strategy to ultimately transfer their business real property into their SMSF.  

Gold and Platinum members, read on for what is a business real property and details of how you can transfer your business property into your SMSF.

This article was prepared by Monica Rule who worked for the Australian Taxation Office for 28 years and is an SMSF Specialist Adviser.  Monica is the author of The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English - www.monicarule.com.au

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