Question of the Week

Question of the week: buying property for retirement

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Q: There has been much commentary of late about the philosophy of purchasing a dwelling through your SMSF and later acquiring it as a retirement abode. Having a positive sense of a reasonable strategy citing investment diversification, the aspects of purchasing an ‘off-the-plan’ apartment at today’s value and CGT advantages in pension phase, the trustees of our fund decided on a site and are making moves toward a commitment to purchase. Then a rather large red flag appeared. Our SMSF administrator, although being very careful to point out that their opinion was not ‘financial advice’ as such, suggested that this strategy is not necessarily legal and to seek urgent advice before proceeding further.

We are well versed in the current regulations about personal use of an SMSF asset, arms-length transactions on sale, non recourse loans and trust setup using a registered company for purchase. Are there other hidden risks to the strategy, apart from the prospective rule changes that the Government may introduce in the future, that may scuttle our plans? My partner and I would hate to be in the position of not being able to procure the property after my retirement in four years time at age 60.

 

A: When someone is waving the red flag, you are right to be concerned and obtain a second opinion. That said, I can’t see anything wrong with the strategy – provided you pay strict attention to the rules you have identified – correct structuring of the limited recourse loan, no personal use of SMSF assets and an ‘arm’s length’ transaction on sale. There are going to be some transaction costs (including stamp duty), and the Government may change the rules down the track. While I think the latter is unlikely, these are considerations you will need to weigh up.

In relation to the purchase of an ‘off the plan apartment’ and a limited recourse borrowing arrangement (LRBA), the ATO has ruled that this is an allowable style of transaction because it involves a single legal title. You can make the deposit upfront using monies in your SMSF and then fund some or all of the balance (depending on how much your bank will advance) using an LBRA. The key here is to make sure it is correctly structured.

I am sensing that your SMSF administrator may be concerned about you (as individuals) purchasing the property from your SMSF. While your fund can’t generally acquire assets from the members or related parties, there is no provision the other way around, provided it is done on an arm’s-length basis. The points you need to consider are:

1. You should carefully check your SMSF’s trust deed. Some older deeds prohibited the transfer of assets between the fund and related parties – so you should confirm that this is allowed;
2. The sale (post retirement) from your fund will generally be subject to stamp duty (there are some concessions in some states for retirees); and
3. Critically, the sale must be on an ‘arm’s-length basis. The ‘sole purpose’ of your SMSF is to provide retirement benefits for the members, so any sale at less than market value would be to the detriment of the members’ retirement benefits and breach the sole purpose test of the SIS Act. To establish and validate market value, you may need to do more than just ask a real estate agent or two for a valuation – you should engage a professional valuer, or possibly even two valuers, to provide an assessment of the property’s market value. Any valuations should be in writing and retained as key fund records.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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