Investing in property through an SMSF has grown in popularity in recent years, particularly since it became possible for SMSFs to borrow money to fund a direct property purchase. Superannuation law permits SMSF trustees to purchase property via their SMSF, subject to several strict rules (see later).
The advantages of SMSFs acquiring real property are manifold, including:
- rental income is taxed concessionally at either 15% if your account is in accumulation phase, or tax-free if your account is in pension phase
- capital gains on disposal/transfer of the property likewise are taxed at the same concessional rates, but include a CGT discount of 33% (or a 10% tax rate if the asset is held for 12-months or more) if your account is in accumulation phase. Note, capital gains are exempt from tax if you are in pension phase
- by acquiring big-ticket assets, it allows members to boost their superannuation balance more quickly than by merely making superannuation contributions (which they may not even have the cash on hand to make), and
- superannuation assets are generally protected in the event of bankruptcy » ability to leverage; providing you with the opportunity to use your capital growth and rental income to borrow against and fund further property acquisitions through your SMSF.
Purchase and usage
Having decided to acquire residential property, there are a number of conditions that must be complied with pre-retirement:
1. Sole purpose test
This requires that SMSF investments must be for the benefit of your retirement, and cannot provide a current pre-retirement, personal benefit to members or related parties. Accordingly, you or a related party cannot live in a residential property owned by your SMSF even where market value rent is paid. This can be contrasted with business real property where it is permissible for your business to rent the property from the SMSF for use in its operations.
2. Investment strategy
The acquisition of the residential property must align and be consistent with your SMSF’s documented investment strategy which must in the first place allow for the acquisition of property. To recap, the superannuation laws require that you must:
- prepare and implement an investment strategy for your SMSF, and
- give effect to and review the strategy regularly.
Your SMSF investment strategy should be in writing and be tailored and specific to your fund’s circumstances. It should not mirror the requirements of the superannuation legislation. The strategy should explain how your investments meet each member’s retirement objectives and circumstances. Relevant circumstances of the members may include (but are not limited to) their age, employment status, and retirement needs (which in turn influence a member’s risk appetite).
3. Related-party acquisitions
Property cannot be acquired from an SMSF member or a related party of the member. The only exception is where the property is business real property. It follows that residential property that is not used wholly and exclusively in a business cannot be acquired from a member or a related party.
STOP PRESS! NEW PROPOSED TAX
Subject to the passage of enabling legislation, from 1 July 2025 unrealised increases in property held inside of an SMSF may be subject to an additional 15% tax for individuals with account balances of $3 million or more. To be clear, this will be in addition to any CGT that is payable when the property is sold.
For example, assume your superannuation fund owns a property and your balance grew from $3 million at 30 June 2025 to $4 million at 30 June 2026. Your earnings for the new extra tax would be $1 million. Although you will pay tax on any rental income your fund receives from the property, you will also be liable to pay tax on a proportion of earnings above $3 million.
In this example, the proportion would be 25%. This means the extra tax you would have to pay on the $1 million of earnings would be $37,500 (($1 million x 25%) x 15% new tax) even though your fund has not sold the property!
A common myth around SMSF property is that the above sole purpose test rules change once a member retires; allowing members and related parties to use residential property for their personal benefit, for example, to live in. This is not the case! Instead, two preconditions must first be met: the member must have met a retirement condition of release, and the property must no longer be owned by the SMSF. Turning to these preconditions…
In order to use the property personally, members must firstly have met a retirement-related condition of release as follows:
Reaching preservation age, and then retiring
This condition is met where you have attained preservation age and an arrangement under which you were gainfully employed has come to an end, and the trustee is reasonably satisfied that you never again intend to become gainfully employed, either on a full-time or part-time basis. Currently ‘preservation age’ is 58 as anybody born from 1 July 1962 to 30 June 1963 will have reached this age by 1 July 2020.
Preservation age will increase to 59 from 1 July 2023 (as anybody born from 1 July 1963 to 30 June 1964 will have reached this age by 1 July 2023).
Turning 60 and then retiring
You have attained this age and an arrangement under which you were gainfully employed has come to an end, and either of the following circumstances apply:
- you attained that age on or before the ending of the employment, or
- the trustee of the fund is reasonably satisfied that you never intend to again become gainfully employed, either on a full-time or part-time basis.
Once an individual turns 65, they can access their superannuation without restrictions even where they are still working. Note that the gainful employment requirement of the earlier two conditions means that individuals who have never worked or who are no longer working once they hit preservation age will generally need to wait until they turn 65 to access their superannuation. This may include the long-term unemployed, the long-term disabled, non-working spouses, inactive directors, and those lucky enough to have received large inheritances (or won the Powerball!) at a young age.
TIP – Returning to work
The above retirement-related conditions permit an individual to later return to employment provided that at the time they originally ceased work and retired, they never intended to return. This is not an uncommon scenario, as some individuals struggle to fill all their spare time or fill the intellectual/ physical/self-esteem void created by finishing work.
To evidence the ending of the employment arrangement, trustees may wish to confirm the cessation with a letter from the individual’s employer, and may wish to insist on a statutory declaration from the individual to evidence their intention at that time not to return to work. This evidence can come in handy in the event that the ATO later makes enquiries, or indeed the super fund auditor themselves raises questions about the return by the individual to the workforce.
As stated, where an individual who qualified under these conditions but subsequently returns to the workforce, this is permitted provided their intention at the time of the ending of the original employment arrangement was not to ever return to work.
However, there is a catch! That is, any future preserved or restricted benefits (such as contributions made by you or on your behalf by your employer, or earnings on those contributions) will be preserved until another condition of release is met, such as once again retiring or reaching 65 years of age.
Transfer of ownership
Transfer of ownership Having met a retirement-related condition of release, in order to use a residential property for your personal benefit, your SMSF must divest itself of its ownership. This can be achieved either by transferring the property into your own name (in-specie transfer) or buying the property from the SMSF.
In-specie transfers (also known as off-market transfers) are transfers of assets in and out of your SMSF without the need to convert them into cash – ownership changes without the exchange of money. In this case, you must execute the transfer of residential (or commercial) property through a contract for sale, showing the member as the ‘purchaser’.
When you retire and start receiving an income stream from your SMSF, you can sell the home in which you currently live and deposit the proceeds into your SMSF (subject to contribution caps or downsizer contribution rules). Simultaneously, if you desire to live in the SMSF property, you could transfer the title into your own name, effectively buying the SMSF property.
(See later Case Study).
Before your SMSF relinquishes its residential property, there are a number of factors that should be considered as follows:
Irrespective of the manner of the residential property transfer (in-specie or sale), stamp duty will generally need to be paid by the recipient member. The amount of duty payable can be considerable where big-ticket assets such as property are in play.
Capital gains tax
Upon transfer of the property, CGT may or may not apply at the following rates:
- 15% if your fund is in accumulation phase (or 10% where the asset has been held for 12 months or more after applying the 1/3rd discount), or
- potentially nil if the asset is covered by the pension exemption.
Regarding the pension exemption, the unsegregated method is the most used method for SMSFs claiming exempt income under the ‘exempt current pension income’ (ECPI) exemption. If an SMSF is paying one or more (retirement phase) pensions in the relevant income year of the CGT event, and the fund is using the unsegregated method in section 295-390 of the Income Tax Assessment Act to calculate its exempt income, the net capital gain will broadly be exempt to the extent that the fund’s assets are used to support a current (retirement phase) pension.
When a residential property is transferred to a member’s name, it may impact their Centrelink entitlements. Understanding the homeowner rules is important as it may impact these entitlements because the asset test threshold for homeowners is lower (however the value of the principal residence is not assessable).
Furthermore, as a result of the transfer, if an individual now owns more than one home, the residence that is not the principal residence will be included in the asset test.
Where, as a result of the transfer, a member now owns two homes, the home that they spend most time in will not count towards the asset test, while the other home will. Returning to the earlier example, if Brock retained his current residence instead of selling it, and spent five months of the year living in it and the remainder of the year living by the sea…only his sea-change home would be exempt from the asset test, while the full value of his current home would count towards that test.
Brock has recently turned 60, has just ceased an employment arrangement, and never again intends to return to the workforce. He has his own SMSF in which it holds a residential property near the water. Desiring a sea-change, he wishes to sell his current main residence and move into the house near the water.
Having met a retirement condition of release, he executes an in-specie transfer of the SMSF property, and sells his main residence for $600,000. To help sustain himself in retirement, Brock then contributes the entire proceeds from the sale into superannuation using a combination of his:
- Downsizer contribution cap of $300,000 (this is the maximum lifetime cap. You may make more than one such contribution, however the total must not exceed this amount. This cap is separate to the concessional and non-concessional caps.
- Bring-forward nonconcessional contribution cap of $330,000 over three years. (This assumes Brock is not already in a bring-forward period, and that he has not made any nonconcessional contributions in the current year).
By using both of these caps, Brock is helping to fund his ongoing superannuation pension, while making his desired sea-change.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.