What you must justify:

When it comes to making any form of investment through a SMSF, the ATO provides the following guidance:

Investments must be purchased on an ‘arm’s length’ basis and must be maintained on a strict commercial basis. The investment must meet the sole purpose test of providing retirement benefits to fund members. In terms of property, this means that the purchase and sale price – as well as the rental income – must reflect a true market rate of return. It also means that you usually cannot buy the property from – or sell the property to – someone associated with any of the Fund’s members.

It also means that neither you nor anyone associated with you can receive any personal benefit of holding the asset. The ATO advises that one of the most common breaches of the sole purpose test is in assets that provide a pre-retirement benefit to a member or associate.

Some examples of a breach would be using a SMSF property as a personal holiday house, or renting a SMSF property to a family member.

SMSF Property Investment:

• SMSFs are able to buy both residential and commercial property – such investments should take into account investor needs and reflect decisions based on capital growth and income sources. SMSF investment strategy needs to take into account the personal circumstances of all the fund members, including their age and risk tolerance and consider:
• diversification (investing in a range of assets and asset classes)
• the liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses)
• the fund’s ability to pay benefits (when members retire) and other costs it incurs the members’ needs and circumstances (for example, their age and retirement needs).

ATO statistics show that a high value of SMSF assets is held in real non-residential property as opposed to residential property. This may reflect the fact that business real property is an exception to the in-house asset and related party acquisition SMSF rules.

A potential benefit for business owners is where business real property is used in a primary production business such as a farm. Under the current rules the investment can still meet the test of being used wholly and exclusively in a business even if it contains a dwelling that is used for private or domestic purposes.

What you cannot buy:

The ATO advises that while you can buy a residential investment property through your SMSF, the Fund cannot own your own home. Nor can your fund own a residential property being rented by a family member or other related party – unless the value of that property is less than five percent of the total value of assets within your SMSF.

The following investments are not permitted under present SMSF rules:

• Family home
• Related party rentals which are less than 5% of total assets

The above information is general in nature and investors should obtain independent financial advice.