Holding property in a self-managed super fund is a well-trodden strategy. It is also unforgiving: the rules that govern it are strict, the penalties for getting them wrong are real, and several of the mistakes cannot be undone after settlement.
Does the purchase actually serve the members' retirement?
Every investment an SMSF makes has to satisfy the sole purpose test — it must be made to provide retirement benefits to members, not to deliver a present-day benefit. A holiday house the members use, or a property bought mainly to help a family member, fails that test regardless of how the paperwork reads.
Is the fund allowed to buy it from this seller?
Funds generally cannot acquire assets from members or their relatives. Business real property is the significant exception, which is why a trading business buying its own premises through the fund is such a common structure. Residential property from a related party is not available, and this catches people out late in the process.
Can anyone use it?
A residential property owned by the fund cannot be lived in or used by members or their relatives, even at market rent. Business real property can be leased to a member's business, but the lease must be on genuine arm's-length terms and the rent must actually be paid, on time, every time.
If borrowing, is the structure right before you bid?
Borrowing inside super requires a limited recourse borrowing arrangement, which means a separate holding trust with its own trustee, established correctly, and the contract signed in the right name. Signing in the wrong name is a costly and sometimes uncorrectable error. Get the structure in place before you go to auction, not after.
Will the fund still have liquidity?
Property is a single indivisible asset. The fund still needs cash to meet loan repayments, insurance, rates, repairs, the annual audit and — once a member starts a pension — the minimum payment. A fund that is all property and no cash is a fund with a problem waiting on the calendar.
Does the investment strategy say so?
Trustees must have a documented investment strategy that considers diversification, liquidity and the members' circumstances, and it has to be reviewed. If the fund is about to put most of its value into one asset, the strategy needs to address that explicitly before the purchase, not be rewritten afterwards.
None of this makes property in super a bad idea. It makes it a strategy that rewards planning. If you are considering it, talk to us before you sign anything.