Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 381

Can your SMSF buy a retirement home for you now?

Can you buy your retirement home now in your SMSF and use it when you retire? It may be tempting but is it possible?

Let's look at Garry and Betty who are the directors of the corporate trustee of their SMSF.  They are contemplating acquiring a property through their SMSF, which they plan to lease to an unrelated third party at market value until both of them reach their preservation age and retire as a condition of release.

They want to know whether it is possible for them to reside in the property as their principal place of residence once both of them have reached this condition of release.

There are a few things that Garry and Betty will need to consider to ensure that the transaction complies with superannuation laws.

Issue 1: the sole purpose test

Is purchasing the property now with the intent to reside in it in the future once the members of the SMSF have met a condition of release a breach of the sole purpose test?

SMSF Ruling 2008/2 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. It also provides that in determining whether an SMSF has satisfied the ‘sole purpose’ test, 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 increase any return for the SMSF and the trustee simply purchased the property because the members always dreamed of retiring to a lovely coastal home, then the ATO may take a sceptical view and rule the transaction a breach of the sole purpose test.

If, on the other hand the trustee has supporting documentation such as valuation reports which shows that the investment property is likely to provide an increase in return for the SMSF, then the sole purpose test may be satisfied, notwithstanding the ancillary purpose.

Issue 2: the property remaining in the SMSF

An SMSF will fail to meet the ‘sole purpose’ test if the SMSF provides a pre-retirement benefit to a member of the SMSF.

If Garry and Betty decide to reside in the property once they have both met a condition of release, they should transfer the property from the SMSF to the members in their personal capacity.

This is to avoid potentially breaching the ‘sole purpose’ test in the event that Garry and Betty residing in the property is treated as a present-day benefit or personal use of an SMSF asset.

Issue 3: capital gains tax and land tax

As a general principle, there is no capital gains tax on a transfer of property between an SMSF and the members of an SMSF in their personal capacity if the property is solely supporting the payment of one or more pensions for the members (i.e. if the property is a segregated current pension asset under the segregation method or under the proportional method if all members interest are in pensions).

If an SMSF sells a property before the members retire, the SMSF is charged 10% capital gains tax.

If an SMSF property is sold whilst all members of the fund are solely in retirement phases, any capital loss realised would be disregarded for tax purposes and cannot be carried forward to offset future capital gains.

In most states and territories, a principal place of residence will not be subject to land tax. As the property will be Garry and Betty’s principal place of residence when acquired, they will not have to pay land tax.

Transfer duty on the transfer from the SMSF to Garry and Betty in their personal capacity will result in transfer duty or nominal duty being paid except in Victoria, the ACT, and Soth Australia where transfer duty on this type of transaction is exempt.

Full ad valorem (‘according to value’) transfer duty is likely to be charged in NSW, Queensland and the NT. In Western Australia, nominal transfer duty of $20 applies in respect of a transfer of, or an agreement for the transfer of, dutiable property from the trustee of an SMSF to a member of the SMSF.

The trustee must still ensure that the in-specie transfer is permitted under the trust deed. If the trust deed is silent on any in-specie transfer, then the trust deed will need to be updated to allow the in-specie transfer to occur.

In summary, while it may seem advantageous to acquire a retirement property through your SMSF with the hope of residing in the property once you retire, there are issues to consider with this type of transaction, particularly ensuring that the SMSF satisfies the sole purpose test. 

 

Elizabeth Wang is a Solicitor at Townsends Business & Corporate Lawyers. This article is for general information only as it does not consider the individual circumstances of any investor. Consult with a legal or financial adviser before acting on any information in this article.

 

RELATED ARTICLES

Meg on SMSFs: At last, movement on legacy pensions

Meg on SMSFs: Winding up SMSFs paying a pension requires care

Tips when taking large withdrawals from super

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

Welcome to Firstlinks Edition 583

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Planning

What will be your legacy?

As we get older, many of us start to think about how we’ll be remembered by those left behind. This looks at why that may not be the best strategy to ensure that you live life well and leave loved ones in good stead.

Economy

It's the cost of government, stupid

Australia's bloated government sector is every bit as responsible for our economic worries as the cost of living crisis. Grand schemes like the 'Future Made in Australia' only look set to make it worse.

SMSF strategies

A guide to valuing SMSF assets correctly

SMSF trustees are required to value all fund assets, including property, at market value when preparing the fund's financial statements each year. Here are some key tips to ensure that you get it right.

Economics

Australia is lucky the British were the first 'intruders'

British colonisation's Common Law system contributed to economic prosperity, in contrast to Latin America's lower wealth under Civil Law. It influenced capitalism's success in former British colonies, like Australia.

Economics

A significant shift in the jobs market

The expansion of the 'care sector' represents the most profound structural change to Australia's job market since the mining boom. This analyses how it's come about and the impact it will have on the economy.

Shares

Searching for value in tech stocks

Just because a stock is cheap doesn't necessarily make it good value. This uses case studies in the tech sector to help identify when stocks trading on 30x earnings may be inexpensive and when others on 10x may be value traps.

Investing

Are more informed investors prone to making poorer decisions?

Finance Professor Michael Finke recently discussed the double-edged sword of taking an interest in your investments, three predictors of panic selling, and why nurses tend to be better investors than doctors.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.