You’re finally reaching your retirement phase: you may have been one of the forward planners who has decided to buy property through their self managed superannuation fund (SMSF).
Now you may be wondering how to capitalise on that investment:
Can you live in your SMSF home?
It is important to note that there are different rules and opportunities permitted to residential property and commercial property owned through your SMSF.
Breaching the rules could result in serious financial, civil or criminal sanctions.
Here we provide a guide for how to live in your SMSF investment property when you retire, and discuss additional investment avenues.
Is it Possible to Live in a SMSF Property Prior to Retirement?
It may seem logical to live in residential property purchased and owned through your SMSF before you retire, however regulations do not allow this. These strict rules exist as superannuation is not intended to function in the same way that a mortgage does.
SMSF property can’t be lived in or rented by you, or any other related parties.
Living in your residential SMSF property or accepting rent from related parties including your family, would be an in-house investment. Laws restrict total SMSF investment to be comprised of no more than 5% of in-house assets [2].
An in specie transfer is only possible after you have reached preservation age and retire, which is 60 years old at the earliest.
Can You Live in Your SMSF Property When You Retire?
The costs of living are on the rise; when you combine this with limited income and living off your retirement funds, it highlights the need to make smart decisions on your investments now.
To many, it makes sense to move into your SMSF investment property after you retire.
SMSF property rules do allow fund members to participate in property investment through their SMSF, though the use of that property is mandated strictly by the superannuation industry.
The title of the SMSF property must be held by the trustees on behalf of the super fund, and rent income must be paid directly into the SMSF. This means that the property title is not in your name and therefore can’t be used by you in a personal capacity.
SMSF property investments must meet the sole purpose test (to provide benefits to members upon retirement). As living in your SMSF property would be seen as benefiting financially from your SMSF retirement fund prior to when you retire, it contradicts the sole purpose test.
But here’s the good part:
There is a way to live in your SMSF property when you retire AND satisfy the sole purpose test.
How Do You Do It?
Self managed super fund SMSF property investing comes with a set of stringent guidelines that must be adhered to.
You must undertake an ‘in specie transfer’ in order for the SMSF property owned by your fund to be transferred into your name as a member for personal use.
An in specie transfer will ensure that you will not be obtaining financial benefit from an asset of your self managed super fund and therefore will not be breaching the sole purpose test.
If your residential property failed to meet the sole purpose test at any point while it was still owned by your SMSF, it may not be eligible for title transfer.
What’s the Sole Purpose Test?
The sole purpose test ensures that the superannuation fund is set up with the objective of providing retirement benefits to members (or to their dependants or family members if the fund member dies before retirement age.)
You won’t meet the sole purpose test if you get a financial benefit when making investment decisions or arrangements, other than increasing the return to your fund.
There is a set of strict rules for what a super fund is legally allowed invest in: if the fund provides any pre-retirement benefits, or personal use of fund assets exists, you will likely fail the sole purpose test.
Sanctions for breaching the sole purpose test include disqualification, fines and imprisonment of trustees depending on the breach. [1]
What’s an In-Specie Transfer?
In specie transfers – also known as off market transfers – are the transfer of ownership of non-monetary assets from one to another without converting the asset into cash. In specie transfers are commonly used to move assets between different SMSF funds or to transfer assets from an individual’s name to their self managed super fund.
In specie transfers are most beneficial to assets held outside of super funds as their transfer does not trigger as Capital Gains Tax event.
When performed for assets held within a super account, the transfer represents a change of both legal and beneficial ownership and trigger an CGT event, as certain tax and superannuation rules apply.
In order to transfer into an SMSF you will need to have the following documentation:
1. Additional Lump Sum Contribution Form
2. Standard Transfer Form
3. Pension Application Form (if transferring into a pension account)
An in specie transfer is only possible once you meet a condition of release which could be either retirement or ending a gainful employment arrangement after age 60 [3].
Are There Any Other Considerations?
There are a number of additional considerations when dealing with SMSF property:
- Be aware that stamp duty and/or other fees and taxes may be applicable to the transfer of residential property from your fund into your personal name and factor these costs into your retirement savings total
- Your ability to offset any losses on your property against your personal taxable income outside of your SMSF
- Commercial property has slightly different rules compared to residential property. Commercial property investments are permitted to be rented at the market rate, on the condition that the property increases the return to the funds for the SMSF fund member.
Other SMSF Property Investment Avenues
Should you sell your SMSF property?
There are no rules stating that you need to do this, and there are a lot of factors weighing in. Consider the market value of the property and the costs to sell. On the upside, selling your SMSF property will likely cover a big chunk of retirement expenses, allow you to re-invest and could reduce your overall tax.
Once you have reached the retirement age of 60 years, consider withdrawing funds from your SMSF, putting it into a bank account and then using it to finance a deposit for a new property. Owning property that generates rental income creates steady cash flow for retired fund members.
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Summary
Merely reaching preservation age does not entitle you to live in the investment property held by your self managed super fund SMSF.
An in specie transfer is the only way to reside in your SMSF property without breaching the sole purpose test. This can only be done when you reach 60 years old and have either commenced retirement, or potentially when you cease gainful employment.
This process places the property into your own name for use in a personal capacity and out of your SMSF.
Consider the costs of stamp duty and other potential fees associated with a transfer between SMSF funds and other assets, and factor this into your savings pool.
Talk to your financial advisor for guidance on the best investments to support your retirement.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.
References
[1] Australian Taxation Office, 2023, Sole Purpose Test
[2] Financial Review, 2022, When Can We Move Into Property Our Superannuation Owns?
[3] Self Managed SF Association, 2021, The Importance of Meeting the Definitions
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